UNIVERSITY  OF  CALIFORNIA 
AT  LOS  ANGELES 


GIFT   OF   CAPT.   AND    MRS. 
PAUL   MCBRIDE  PERIGORD 


-UNIVERSITY  of  CALlFOKJJi 


AT 


JtX)S  ANGELES 
UBRARY 


OUR   ECONOMIC   ORGANIZATION 


1 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   •    CHICAGO  •    DALLAS 
ATLANTA   •    SAN    FRANCISCO 

MACMILLAN  &   CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


OUR   ECONOMIC 
ORGANIZATION 


BY 

LEON   C.   MARSHALL 

ROFESSOR    OF    POLITICAL    ECONOMY    AND 

DEAN  Olt  THE  SCHOOL  OF  COMMEKCE 

AND       ADMINISTRATION,       THE 

UNIVERSITY   OF    CHICAGO 

/  AND 

LEVERETT   S.   LYON 

88ISTANT    PROFESSOR    OF    COMMERCIAL 
ORGANIZATION,    THE    UNIVER- 
SITY  OF    CHICAGO 


Nefo  gork 

THE   MACMILLAN    COMPANY 
1921 

All  rights  reterved 

138163 


copteioht,  1921, 
bt  the  MACMILLAN  COMPANT. 


Set  up  and  electrotyped.    Published  January,  1921. 


Norfaooli  ^tesi 

J.  S.  Gushing  Co.  —  Berwick  &  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


H  1^ 

n  I 


PREFACE 

This  book  has  been  prepared  for  those  who  are  beginners 
in  the  study  of  economics,  or  who  are  making  their  first  serious 
study  of  the  business  of  social  hving.  It  is  an  attempt  to  de- 
scribe the  way  in  which  we  hve  and  work  with  one  another  in 
modern  Ufe  in  our  effort  to  gratify  our  wants. 

The  material  is  an  outgrowth  of  a  considerable  period  of 
experience  and  experiment  both  with  secondary  school  stu- 
dents and  with  beginners  in  university  classes  in  economics. 
The  book  has  been  used  successfully  in  mimeographed  form  in 
a  variety  of  institutions  and  has  in  its  present  form  the  benefit 
of  many  suggestions  from  these  sources.  At  the  University  of 
Chicago  it  has  been  used,  with  much  supplementary  material, 
in  a  course  for  freshmen.  This  course  is  followed  by  one  of 
equal  length  on  value  and  distribution. 

In  the  minds  of  the  authors,  the  distinguishing  feature  of  the 
volume  is  the  effort  to  depict  social  structures  in  terms  of  what 
they  do.  The  functions,  the  uses,  the  ivork,  of  banks,  of  business 
organization,  of  competition,  of  specialization,  of  government, 
of  scientific  management,  of  education,  and  of  the  other  multi- 
tudinous agencies  which  together  make  up  our  modern  want- 
gratifying  machine,  are  the  matters  with  which  the  book  is 
concerned.  It  is  a  study  of  the  devices  which  exist  in  industrial 
society,  primarily  in  terms  of  their  activities,  and,  quite  second- 
arily, in  terms  of  their  structures. 

The  more  experienced  reader  may  be  surprised  that  separate 
sections  on  value  and  distribution,  which  hold  such  central  places 
in  many  texts,  do  not  appear  in  this  work.  The  authors  be- 
lieve that  in  an  introductory  work  of  the  type  here  presented  the 
violation,  if  any,  is  chiefly  to  tradition.  The  usefulness,  in  an 
introductory  course,  of  building  the  presentation  around  the 


VI  PREFACE 

abstract  type  of  value  and  distribution  theory  (especiall}^  be- 
fore the  student  has  become  acquainted  with  the  actual  struc- 
tures of  the  market,  the  nature  of  cooperative  production,  and 
the  significance  of  pecuniary  guidance)  has  been  repeatedly 
questioned  by  experienced  teachers  of  economics.  There  is 
no  allegation  that  "value  theory"  is  without  place ;  there  is  a 
query  concerning  the  best  use  to  make  of  it  in  an  introductory 
course.  The  authors  have  no  desire  to  take  any  final  stand 
concerning  the  appropriate  organization  of  any  course  in  this 
period  of  experimentation  in  economics  teaching.  They  have 
found,  however,  that  there  is  a  place  for  an  introductor}^  course 
of  the  type  contained  in  this  book,  and  they  have  omitted  sepa- 
rate discussion  of  value  and  distribution  theory  with  the  more 
composure  because  of  the  large  number  of  available  texts  which 
so  ably  present  that  material. 

The  authors  think  of  the  book,  from  the  point  of  view  of 
teaching  technique,  as  being  made  up  of  three  parts.  The  first 
part  is  made  up  of  Studies  I  and  II.  Here  the  student  is  given 
a  bird's-eye  view  of  the  problems  at  issue.  Studies  III  to  VIII, 
on  medieval  industrial  society  and  the  coming  in  of  capitalism, 
form  a  second  part.  These  studies  are  not  "historical"  in  any 
orthodox  sense  of  the  term.  They  are  a  somewhat  more  ex- 
tended introductory  view  of  the  problems  at  issue,  in  which  the 
device  of  comparative  study  is  utilized.  They  really  present 
another  general  survey  of  modern  industrial  society,  but  they 
do  it  "over  the  shoulder"  of  a  former  society.  Study  IX  begins 
the  third  part  of  the  work,  which  is  devoted  to  a  more  direct,  de- 
tailed, and  systematic  study  of  our  present  economic  organiza- 
tion. 

The  use  of  the  problems  should  be  a  matter  of  judgment  with 
individual  instructors.  The  problems  are  of  different  degrees 
of  difficulty  and  of  varied  types.  Those  should  be  chosen  for 
study  which  the  instructor  believes  will  be  best  adapted  to  his 
location,  his  students,  and  his  object  at  any  given  moment. 

It  will  be  apparent  that  the  references  for  further  study, 
given  at  the  end  of  each  study,  have  been  confined  to  a  very 


PREFACE  Vll 

small  list  of  those  works  which  may  be  used  in  (}uite  close  con- 
nection with  the  scheme  of  presentation  here  followed.  Per- 
haps it  should  be  mentioned  that  the  Lessons  in  Community 
and  National  Life  (published  by  the  United  States  Bureau  of 
Education  and  obtainable  at  a  small  charge  from  the  Super- 
intendent of  Documents,  Washington,  D.  C.)  are  not  designed 
for  college  use.  So  far  as  the  authors  know,  they  have  been  used 
only  in  secondary  schools.  The  Readings  in  Lyidustrial  Society 
and  the  Industrial  and  Social  History  of  England  are  available 
for  both  secondary  and  collegiate  use. 

During  the  preparation  of  the  manuscript  helpful  suggestions 
have  come  from  many  persons.  Among  our  colleagues  C.  W. 
Wright,  H.  G.  Moulton,  and  Stuart  Hamilton  have  read  the 
entire  work  in  manuscript  form,  and  have  given  much  useful 
counsel.  C.  0.  Hardy,  Herman  Oliphant,  W.  H.  Spencer, 
J.  0.  McKinsey,  Conyers  Read,  H.  H.  Barrows,  M.  J.  Janov- 
sky,  and  Jacob  Viner  have  all  made  suggestions  in  their  spe- 
cial fields.  To  the  instructors  in  secondary  schools,  in  other 
colleges,  and  at  the  University  of  Chicago  who  have  contributed 
the  results  of  their  experience  with  the  book,  and  to  publishers 
and  other  business  concerns  whose  courtesy  has  added  to  the 
volume,  a  debt  is  owing.  There  has  been  a  conscientious  effort 
to  give  specific  acknowledgment  in  footnotes  when  this  was  due. 
The  material  has,  however,  passed  through  so  many  stages  that 
possibly  some  cases  where  acknowledgment  should  have  been 
made  have  escaped  attention.  If  this  has  occurred,  general 
recognition  of  such  assistance  is  here  made.  The  authors  alone, 
of  course,  accept  the  responsibility  for  what  appears. 

Leon  C.  Marshall 
Leverett  S.  Lyon 

Chicago,  Illinois 

December  25th,  1920. 


CONTENTS 


I.     Our  Wants  and  the  Goods  that  Gratify  Them         .         1 
II.     Our  Social  Resources  and  Our  Economic  Organization       11 

III.  The  Functioning  Structure  of  Medieval  Industrial 

Society  —  A.  The  Self-sufficing  Medieval  English 
Manor 25 

IV.  The  Functioning  Structure  of  Medieval  Industrial 

Society  —  B.   Medieval  Towns  and  Manufactures      40 
V.    The  Functioning  Structure  of  Medieval  Industrial 
Society  —  C.    The      Beginning     of     Cooperation 

through  Exchange 56 

VI.     The    Beginnings    of    Capitalistic    Agriculture    and 

Manufacture 72 

VII.     The  Rise  of  the  Modern  Organization  of  Trade  and 

Commerce 88 

VIII.     The  Industrial  Revolution  :    The  Rise  of   Machine 

Industry 106 

IX.     The  Specialization  of  Business  Units  .         .         .     127 

X.     Specialization  within  Business  Units  ....     149 

XI.     Territorial  Specialization 167 

XII.     An  Evaluation  op  Specialization  ....     192 

XIII.  Machine  Industry  —  An  Example  of  Modern  Tech- 

nology     207 

XIV.  Machine  Industry  and  Indirect  Costs         .         .         .     231 
XV.     The   Size   of   Maximum  Efficiency   of  the   Business 

Unit 250 

XVI.    The  More  Usual  Types  of  Business  Units                 .     268 
^^VII.     Concentrated  Control,  Combinations,  and  Monopo- 
lies          292 

XVIII.     The  Guidance  of  Economic  Activity    .        .        .        .315 
XIX.    The  Work  of  Money  in  Economic  Organization        .     335 

ix 


CONTENTS 


8TUDT 

XX. 
XXI. 


XXII. 

XXIII. 
XXIV. 


Financial  Institutions  and  Financial  Organization  . 

The  Tasks  of  the  Business  Enterpriser  in  Meeting 
Risks 

Internal  Business  Organization  and  Effective  Utili- 
zation OF  Productive  Resources 

The  Wise  Utilization  of  Natural  Resources 

The  Wise  Utilization  of  Human  Resoukces 


XXV.     Planning,  Guiding,  and  Controlling 


Index 


PAGE 

354 


373 

397 
419 

448 
468 

489 


OUR  ECONOMIC   ORGANIZATION 


OUR  ECONOMIC  ORGANIZATION 

STUDY  I 
OUR  WANTS  AND  THE  GOODS  THAT  GRATIFY  THEM 

PURPOSES  OF  THIS   STUDY: 

1.  To  see  why  people  have  to  work. 

2.  To  study  our  wants  and  the  goods  that  gratify  them. 

People  have  wants.  —  A  teacher  once  asked  his  pupils  to 
bring  into  class  two  lists  —  first,  a  list  of  things  that  they 
wanted,  and  second,  a  list  of  things  that  they  wanted  with 
which  nature  provided  them  freely,  without  any  effort  or  cost. 
The  next  day,  every  member  of  the  class  appeared  with  his 
first  Ust  a  long  one.  One  student  had  put  down  on  his  Hst  of 
wants  clothes,  candy,  food,  automobile,  new  bicycle,  tickets 
to  the  opera,  some  dentistry  work,  a  trip  to  Europe,  a  riding 
horse,  and  a  house.  The  second  hst  —  things  which  nature  pro- 
vided freely  —  was  in  every  case  a  short  one.  One  student  had 
put  down  air,  water,  and  light.  But  some  one  in  the  class  ob- 
jected, pointing  out  that  his  wants  for  light  were  not  provided 
for  by  nature,  excepting  pa.rt  of  the  time  and  in  certain  places. 
He  said  that  his  want  for  light  in  the  evening  was  quite  as  great 
as  during  the  day,  and  called  attention  to  the  fact  that  the  light 
in  the  room  at  that  moment  was  furnished  partly  by  electric- 
ity at  considerable  cost.  Another  student  said  that  the  same 
facts  held  true  for  the  water  supply ;  that  water  was  not  fur- 
nished freely.  This  student  said  that  the  only  water  he  ever  used 
came  from  a  faucet  connected  with  a  city  water  main  and  that 
his  father  was  always  complaining  of  the  taxes  necessary  to 
pay  the  cost  of  keeping  up  this  and  other  forms  of  the  city's 
service.     The  same  student  raised  the  question   whether  air 

1 


2  OUR  ECONOMIC   ORGANIZATION 

was  always  furnished  freely  by  nature.  He  said  he  was  not 
sure,  but  believed  that  in  the  school  building  the  air  was 
pumped  in  by  a  ventilating  system  which  had  cost  a  great  deal 
of  money. 

Perhaps  the  lists  which  these  students  brought  into  their 
class  could  have  been  improved.  Nevertheless  they  served  to 
bring  out  several  significant  facts.  One  of  the  first  facts  de- 
veloped in  the  class  discussion  was  that  mankind  has  an  almost 
endless  variety  of  wants.  There  seems  to  be  literally  no  end 
to  them,  even  taking  us  as  we  are  to-day,  and  every  broaden- 
ing of  our  mental  horizon  shows  us  new  desirable  things  and 
broadens  the  field  of  our  wants. 

Environment  is  of  importance  in  gratifying  wants.  —  The 
class  discussion  ajso  brought  out  some  very  interesting  facts 
about  a  word  that  was  new  to  many  members  of  the  class. 
This  was  the  word  "  environment."  First  the  class  learned 
that  we  speak  of  all  the  conditions  which  surround  a  thing  as  its 
environment.  Then  they  saw  that  environment  is  very  impor- 
tant to  any  form  of  life.  Take,  for  example,  a  robin.  Climate, 
plants,  temperature,  birds,  soil,  rainfall,  wind,  insects,  and  other 
robins  are  all  parts  of  the  environment  of  a  robin  and  are  im- 
portant in  determining  whether  it  shall  live.  Flowers,  sunshine, 
rain,  snow,  and  wind  are  important  parts  of  the  environment  of 
a  honey  bee;  very  important,  too,  are  other  bees  which  are 
competing  for  the  supply  of  food.  Many  of  the  elements  in 
the  environment  of  any  organism  are  favorable  and  helpful, 
but  many  are  unfavorable.  The  Indians  were  unfavorable 
factors  in  the  life  of  the  pioneers.  Men  like  Daniel  Boone, 
Kit  Carson,  and  Buffalo  Bill,  with  their  rifles,  were  in  turn 
unfavorable  to  the  Indians.  To  a  fox,  rabbits  are  a  favorable 
part  of  the  environment;  ])ut  to  a  rabbit,  foxes  are  a  very 
unfavorable  factor.  A  flower  is  favored  by  sunshine,  gentle 
rain,  and  warmth,  but  dies  when  its  environment  changes  to 
a  storm  of  cold  wind  and  hail.  The  effort  to  live  among  the 
unfavorable  factors  in  an  environment  loads  to  a  great  fight, 
described  in  the  next  paragraph. 


OUR  WANTS  AND  GOODS  THAT  GRATIFY  THEM    3 

The  struggle  for  existence.  —  Every  animal  and  plant  is  en- 
gaged in  a  constant  contest  with  all  the  unfavorable  factors  in 
its  environment.  It  is  a  contest  in  which  the  prize  is  life, 
and  defeat  means  death.  This  struggle  of  organisms  for  life 
against  the  unfavorable  elements  of  environment  is  commonly 
called  the  "  struggle  for  existence.''  What  organisms  are  gener- 
ally victorious  in  this  struggle  ?  Which  ones  survive?  Herbert 
Spencer,  one  of  the  great  writers  on  this  subject  of  the  struggle 
for  existence,  has  said,  "  those  will  survive  that  are  fittest." 
What  does  "  fittest,"  or  most  fit,  mean  here?  It  does  not  mean 
that  the  best-natured  bear,  or  the  most  beautiful  flower,  the 
most  symmetrical  tree,  or  the  most  tender-hearted  man  will 
survive.  It  means  that  those  which  *'  fit  "  best  into  the  existing 
environment,  that  is,  which  are  best  fitted  or  adapted  to  it  will 
survive.  In  a  cold  climate,  animals  with  long  fur  will  be  more 
likely  to  survive  than  thinly  coated  ones.  Every  one  knows  that 
in  the  far  north  there  are  found  only  such  animals  as  the  polar 
bear,  the  walrus,  and  the  seal,  all  of  which  are  well  protected 
from  the  cold.  What  animals  would  survive  in  a  warm 
climate?  Clearly,  those  would  survive  whose  coats  were  not 
too  heavy,  and  whose  other  characteristics  were  adapted  to 
the  environment  in  which  they  found  themselves. 

The  adaptation  of  plants  and  animals  to  their  environment 
has  come  to  be  called  a  passive  adaptation.  It  is  called  passive 
because  plants  and  animals,  as  compared  with  man,  do  not 
make  things  over  to  suit  themselves.  They  are  born  into  an 
environment;  if  they  are  well  enough  adapted  to  it,  or  can 
themselves  change  enough  to  become  suited  to  it,  they  sur- 
vive ;  if  not,  they  perish.  As  a  matter  of  fact,  many  species 
of  animals  that  formerly  lived  on  the  earth  have  become 
extinct.  Geologists,  digging  deep  in  layers  of  the  earth  that 
were  formerly  on  the  surface,  or  delving  in  old  caves,  have 
found  skeletons  of  great  saber-toothed  tigers  and  other  strange 
animals  and  reptiles  that  no  longer  exist.  These  species 
have  disappeared  because  some  change  in  their  environment 
made  them  losers  in  the   struggle   for  existence.     They   were 


4  OUR  ECONOMIC   ORGANIZATION 

crowded  out,  leaving  those  organisms  better  fitted  for  the  con- 
ditions which  at  that  time  surrounded  them. 

On  the  other  hand,  mankind  has  reacted  very  differently  to 
environment  than  have  plants  and  animals.  Man  has  changed 
the  environment.  The  existence  of  a  favorable  environment  is 
not  a  matter  of  indifference  to  man.  By  no  means.  The  life  of  a 
pioneer  shows  how  important  it  is  to  have  a  good  environment. 
And  environment  is  not  always  friendly  to  human  beings.  But 
man  as  a  race  has  refused  to  die  even  in  the  presence  of  an  un- 
favorable environment.  He  has  refused  to  admit  that  there  are 
many  places  on  the  earth  where  he  cannot  live.  He  has  carried 
on  and  is  constantly  carrying  on  a  great  process  of  adaptation. 
In  this  process  either  man  or  nature  must  be  changed.  Has  man 
changed?  Has  he  done  away  with  hunger,  or  the  need  for 
warmth?  To  some  slight  extent  man  has  changed  through 
passive  adaptation,  but  to  a  greater  extent  than  is  true  of  any 
other  organism  in  the  world,  man  has  changed  his  environment 
rather  than  himself.  He  has  built  houses,  kept  fires,  and  pro- 
vided clothing  to  protect  himself  from  cold.  He  has  stored 
ice  and  built  refrigerating  plants  to  spare  himself  from  heat. 
He  has  invented  and  built  telegraphs,  telephones,  canals,  turn- 
pikes, and  railroads  to  cause  distances  to  shrink.  In  brief,  he 
has  adapted  nature  to  himself  rather  than  himself  to  nature. 
We  call  this  active  adaptation. 

The  students  saw  more  clearly  the  importance  of  environ- 
ment to  all  of  us  as  they  came  to  realize  that  we  gratify  many  of 
our  wants  by  using  our  environment.  Thus,  if  there  were  no 
iron  ore  in  our  environment  we  could  have  no  automobiles  or 
locomotives  —  at  least,  none  of  the  kind  we  now  have.  Without 
an  environment  including  coal,  warm  coal  fires  would  be 
impossible,  and  if  there  were  no  trees,  all  the  uses  of  wood 
would  be  denied  us. 

There  are  free  goods  and  economic  goods.  —  As  the  students 
discussed  their  lists  of  wants  and  how  these  wants  are  gratified, 
it  became  clear  that  some  of  our  needs,  for  example,  the  desire 
for  air,  are  gratified,  under  most  conditions,  without  effort  on 


OUR  WANTS  AND   GOODS   TPIAT   GRATIFY   THEM        5 

our  part.  In  other  words,  nature  gratuitously  provides  the 
goods  with  which  we  gratify  a  few  of  our  wants.  These  we  call 
free  goods.  For  the  most  part,  however,  we  can  gratify  our 
wants  only  by  making  over  nature  —  only  by  active  adaptation 
—  only  by  making  goods  available  at  the  cost  of  effort.  We 
say  of  such  goods  that  they  are  not  free  goods  —  that  they  are 
not  plentiful  enough  to  satisfy  our  desires  for  them.  They  are 
not  given  freely  and  gratuitously  by  nature.  As  contrasted 
with  free  goods,  these  are  called  economic  goods. 

Economic  goods  are  of  two  kinds  —  material  and  71  on-material. 
Material  economic  goods  are  those  tangible  things  such  as 
clothes,  automobiles,  cigars,  and  shoes  which  gratify  wants. 
These  are  called  wealth.  Sometimes  wealth  is  in  such  a  form 
that  it  is  ready  to  gratify  our  wants  immediately.  Such  wealth 
is  called  consumption  goods.  But  sometimes  wealth  is  in  a  form 
in  which  we  use  it  indirectly  to  gratify  our  wants,  —  in  which  we 
use  it  to  make  more  economic  goods.  Examples  of  this  are 
our  store  buildings,  wagons,  and  tools.  Such  wealth  is  called 
capital  or  production  goods.  Non-material  economic  goods  are 
called  services.  Some  services  gratify  wants  directly.  This 
would  be  true  of  the  work  of  an  actor,  a  singer,  or  the  advice  of  a 
doctor.  Other  services  gratify  wants  only  indirectly  through 
producing  more  goods.  Examples  of  this  would  be  the  work 
of  a  plumber  or  a  machinist. 

This  discussion  of  kinds  of  goods  which  can  be  applied  to  our 
wants  can  perhaps  be  made  clearer  by  the  use  of  the  following 
diagram  of  want-gratifying  goods : 

I  Free 

I  (  Consumer's  goods 

Want-gratifying  goods  <  f  Wealth  (material)  { 


Economic 


[  Producer's  goods 


Services  (non-material) 


Wealth  is  in  many  forms.  —  The  following  table,  which  is 
taken  from  the  United  States  Census  Report,  shows  some 
of  the  more  important  forms  of  wealth  and  the  value  that  we 


6  OUR   ECONOMIC   ORGANIZATION 

place  on  them.  It  will  be  noticed  that  in  this  table  the  different 
forms  of  wealth  are  measured  in  terms  of  dollars.  It  would  be 
possible  to  measure  them  also  in  terms  of  physical  units,  such  as 
feet,  tons,  yards,  or  acres. 

FoKMS  OF  Wealth,  1912 
Total $187,739,071,000 

Real  property  and  improvements  taxed     ....  98,362,813,569 

Real  property  and  improvements  exempt ....  12,313,519,502 

Livestock 6,238,388,985 

Farm  implements  and  machinery 1,368,224,548 

Manufacturing  machinery,  tools,  and  implements  6,091,151,274 

Gold  and  silver  coin  and  bullion       2,616,642,734 

Railroads  and  their  equipment 16,148,532,502 

Street  railways,  etc. 

Street  railways 4,596,563,292 

Telegraph  systems 223,252,516 

Telephone  systems 1,081,433,227 

PuUman  cars  not  owned  by  railroads     ....  123,362,701 

Shipping  and  canals 1,491,117,193 

Irrigation  enterprises       360,865,270 

Privately  owned  water-works 290,000,000 

Privately  owned  central  electric  light  and  power 

stations 2,098,613,122 

All  other : 

Agricultural  products 5,240,019,651 

Manufactured  products 14,693,861,488 

Imported  merchandise 826,632,467 

Mining  products 815,552,233 

Clothing  and  personal  adornments 4,295,008,593 

Furniture,  carriages,  and  kindred  property       .     .  8,463,216,222 

In  this  table  can  be  found  examples  of  consumption  goods, 
such  as  furniture  and  carriages,  when  these  aie  in  the  possession 
of  the  consumer.  There  are  also  many  examples  of  capital,  such 
as  machinery  and  railroads. 

Services  are  as  significant  as  wealth.  —  It  is  easy  to  see  the 
significance^  of  wealth  in  gratifying  wants.     Any  one  can  see  the 


OUR  WANTS  AND  GOODS  THAT  GRATIFY  THEM   7 

important  part  that  is  played  in  want-gratification  by  pork, 
potatoes,  clothes,  steel  rails,  putty,  factories,  tables,  glass, 
cutlery,  and  clocks.  But  what  of  the  significance  of  services  ? 
It  is  worth  our  while  to  think  about  this.  If  you  think  of  the 
most  interesting  book  you  ever  read,  would  you  agree  that  the 
author  gratified  human  wants  in  writing  it?  Did  he  create 
economic  goods?  If  so,  what  kind?  Think  of  the  most 
enjoyable  play  you  have  ever  seen.  Did  the  author  of  that 
play  create  economic  goods  ?  Did  the  actors  who  produced  it  ? 
Of  what  kind?  What  sort  of  economic  goods  did  General 
Grant  create?  What  kind  of  economic  goods  did  Abraham 
Lincoln  and  Woodrow  Wilson  produce  as  Presidents?  What 
kind  were  created  by  the  inventors  of  the  steam  engine,  the  auto- 
mobile, the  aeroplane,  the  telephone  ?  Think  of  the  services  of 
Edison  as  an  inventor  or  Burbank  as  a  horticulturist.  How 
can  one  state  the  importance  to  society  of  the  services  rendered 
by  such  great  teachers  as  Jesus,  or  the  amount  of  human  wants 
gratified  by  the  research  students  who  discovered  the  pre- 
ventives for  smallpox  and  diphtheria?  Yet  what  these  men 
produced  was  not  material  wealth  but  services. 

Conclusions.  —  We  may  then  draw  the  conclusion  that  man- 
kind has  wants  and  that  nature  does  not  gratify  many  of  them 
freely.  We  find  it  necessary  to  provide  the  wealth  and  serv- 
ices that  gratify  our  wants.  We  work  to  secure  what  we 
desire.     Stated  in  diagrammatic  form  : 


Man 

has 

wants. 

which  he  attempts 

to  satisfy  by 

making 


economic 
goods 


consisting  of 


wealth 

and 
services 


In  spite  of  all  that  we  have  done  to  secure  want-gratifying 
goods,  we  have  never  caught  up  with  our  desires.  Man's  wants 
seem  capable  of  almost  limitless  expansion.  We  have  many 
things  of  which  our  grandfathers  never  dreamed  and  we  want 
many  more.  No  matter  how  many  wants  we  gratify,  there 
seem  always  to  be  "  other  things  "  we  want. 


8  OUR   ECONOMIC   ORGANIZATION 

PROBLEMS  1 

1.  Make  a  list  of  twenty-five  things  you  want.  What  ones  of  these 
are  furnished  freely  by  nature? 

2.  Draw  up  a  list  of  your  wants  classified  under  the  headings : 

a.  Wants  for  wealth. 

b.  Wants  for  services. 

Are  they  confined  to  things  wliich  enter  into  commerce?  Are  they 
confined  to  material  things?  Do  we  always  desire  those  things  which 
are  beneficial? 

3.  Do  wants  ever  come  from  custom  and  habit  or  are  they  always 
guided  by  reason  ?  In  which  class  would  you  put  men's  wants  for  neck- 
ties?    Women's  v/ants  for  jewelry? 

4.  Have  people  always  wanted  the  same  things?  Did  George 
Washington  want  a  phonograph?  Name  five  things  you  want  that 
your  grandfather  did  not  want. 

5.  What  are  some  of  the  more  unfavorable  factors  in  the  environ- 
ment of  a  flower;  of  a  mouse?  Write  a  definition  of  the  phrase, 
"adaptation  to  environment." 

6.  Is  it  fortunate  for  the  polar  bear  that  his  fur  is  white?  If  so, 
explain  why.  Of  what  use  to  the  leopard  are  his  spots  ;  to  the  tiger 
his  stripes? 

7.  Consult  a  teacher  of  science,  or  a  textbook  in  biology  or  zoology, 
for  ten  cases  of  "adaptation  to  environment,"  and  report  to  the  class. 

8.  Write  a  definition  of  environment. 

9.  Wliat  is  the  "struggle  for  existence"?  Do  animals  ever  kill 
others  of  their  own  species  in  this  struggle?     Does  man? 

10.  It  is  said  that  250,000  fishes  die  every  year  for  one  that  li^-es,  and 
that  half  a  million  starfish  die  every  year  for  one  that  lives.  What 
causes  so  many  to  die  ? 

11.  If  two  out  of  every  hundred  human  beings  in  a  modern  city  die 
every  j'ear,  the  death  rate  is  thought  to  be  high.  Can  you  give  any 
of  the  factors  that  make  the  death  rate  among  human  beings  so  much 
lower  than  that  among  plants  and  animals?  Find  out,  from  the  De- 
partment of  Health  or  elsewhere,  the  "  death  rate  "  in  your  community. 

■  See  preface,  p.  vi,  authors"  statement  in  regard  to  problems. 


OUR   WANTS   AND   GOODS   THAT   GRATIFY   THEM        9 

12.  Why  is  it  sensible  to  speak  of  our  efforts  to  adapt  nature  to  us  as 
"active  adaptation"? 

13.  "  Man  ranks  among  the  most  adaptable  organic  beings  on  earth." 
Explain. 

14.  You  live  in  a  "man-made"  environment.  Can  you  explain 
what  this  means?  What  are  some  of  the  man-made  factors  in  it?  Is 
the  temperature  that  surrounds  your  body  provided  by  nature  or  made 
possible  by  effort?  Could  you  live  in  the  natural  temperature  of  your 
locality? 

15.  If  your  father  were  planning  to  move  your  family  to  another 
town,  would  he  think  it  important  to  consider  the  question  of  soil, 
rivers,  and  temperature  in  the  new  location?  Why,  or  why  not? 
What  would  be  the  considerations  that  would  be  most  likely  to  de- 
termine his  choice  of  a  new  home  ? 

16.  Would  you  consider  your  parents,  teachers,  and  friends  as  im- 
portant elements  in  your  environment?  Would  you  consider  the  ap- 
pearance of  the  streets,  public  buildings,  parks,  and  roadways  as  part 
of  your  environment?  What  are  some  of  these  in  your  town  or 
city  that  you  enjoy?  Some  that  are  displeasing  to  you?  Does  it 
seem  to  you  that  you  might  be  different  if  any  or  all  of  these  were 
different  ? 

17.  What  seem  to  you  the  important  elements  in  your  environment  ? 
Can  you  group  them  into  classes? 

18.  Be  sure  you  know  the  meaning  of  the  foUowang  terms  :  wealth, 
services,  capital,  consumer's  goods,  free  goods,  economic  goods. 

19.  Give  five  illustrations  of  each  of  the  terms  used  in  the  preceding 
question. 

20.  Can  you  name  any  business  men  who  are  engaged  in  the  process 
of  gratifying  human  wants?  Can  you  name  any  professional  men  who 
are  thus  engaged  ? 

21.  Name  five  kinds  of  business  men  who  aid  in  producing  wealth; 
five  who  produce  services. 

22.  The  doctor,  the  preacher,  the  surgeon,  the  newspaper  man,  the 
teacher,  and  the  opera  singer  are  doing  the  same  thing.  Is  this  so? 
If  so,  what  thing? 

23.  Are  the  following  wealth :  a  pie,  shoes,  cigars,  a  hoe,  whisky,  a 
street  roller,  your  desk  ?     Which  are  capital  ? 


10  OUR  ECONOMIC   ORGANIZATION 

24.  Of  the  men  who  live  in  your  block,  how  many  spend  most  of 
their  time  in  work  to  gi'atif y  other  people's  wants  ? 

25.  About  what  part  of  all  men's  time  is  spent  in  working  to  gratify 
people's  wants? 

26.  Give  a  Ust  of  the  courses  in  your  school  that  might  aid  people 
in  learning  to  make  nature  over  to  gratify  their  wants. 

27.  Make  an  outline  of  the  main  points  in  this  lesson.  Be  sure  your 
outUne  contains  a  carefully  worded  definition  of  every  new  term  in  the 
lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  Selections  1,  2,  3, 103,  320. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life: 
Series  A,  Lesson  A-2,  Lyon,  "  The  Western  Pioneer." 


STUDY   II 

OUR  SOCIAL  RESOURCES  AND  OUR  ECONOMIC 
ORGANIZATION 

PURPOSES  OF  THIS  STUDY : 

1.  To  understand  what  means  are  avaUable  in  the  process  of  active 

adaptation. 

2.  To  sketch  how  all  these  means  are  combined  in  an  economic  or- 

ganization. 

We  have  seen  that  very  few  of  our  wants  are  gratified  freely 
by  nature.  We  must  work  to  make  nature  over.  We  must 
engage  in  active  adaptation.  Just  what  do  we  use  in  this 
process  of  active  adaptation? 

Natural  resources  are  used  in  adaptation.  —  Perhaps  the 
most  important  of  the  means  or  materials  or  resources  which 
are  available  in  active  adaptation  are  those  furnished  by 
nature.  We  sometimes  call  them  natural  resources.  One  of 
these  is  soil.  In  nearly  every  inhabited  country  there  is  soil 
which  is  sufficiently  fertile  to  raise  food  supplies.  Europe, 
North  America,  South  America,  Africa,  Asia,  and  Australia 
all  have  vast  stretches  of  fertile  soil.  It  is  not  difficult  to  see 
how  important  this  is  as  a  resource  in  gratifying  our  wants. 
Other  natural  resources  are  equally  important.  Iron,  petroleum, 
coal,  water  power,  the  force  of  gravity,  rainfall,  and  sunshine 
must  all  be  included  among  the  natural  physical  resources  which 
we  can  use  in  making  want-gratifying  goods.  Sometimes 
economists  use  the  term  "  land  "  to  cover  all  these  resources. 

One  writer  emphasizes  the  importance  of  natural  resources 
thus: 

"Examine  them  as  wc  may,  we  find  that  every  want  of  man,  whether 
Eskimo  or  banker,  is  a  desire  for  one  of  these  six  classes  of  goods : 

11 


12 


OUR   ECONOMIC    ORGANIZATION 


SOCIAL  RESOURCES  AND   ORGANIZATION 


13 


14  OUR  ECONOMIC   ORGANIZATION 

food,  clothes,  house  or  shelter,  fuel,  luxuries,  and  tools  and  materials 
of  industry  which  enable  him  to  produce  and  handle  the  others.  So 
nearly  universal  are  these  wants  that  practically  all  men  have  all  six 
classes  of  goods.  Even  savages  have  luxuries  in  the  form  of  toys, 
ornaments,  and  musical  instruments. 

"All  these  materials  for  a  living  come  directly  or  indirectly  out  of 
the  soil  or  crust  of  the  earth.  The  man  in  a  ship  at  sea  or  in  a  steel 
sky-scraper  in  a  modern  city  gets  liis  sustenance  from  the  soil  just  as 
surely  as  does  the  farmer  who  takes  potatoes  from  the  furrow.  Each 
particular  method  by  which  a  man  gets  some  useful  commodity 
leads  to  an  industry  often  of  world-wide  distribution.  To  understand 
the  way  the  human  race  turns  the  earth  into  its  home,  we  have  but 
to  study  the  various  industries  by  which  groups  of  men  achieve  their 
living. 

"  While  ultimately  depending  upon  the  contents  of  the  earth's  crust, 
most  of  our  living  comes  indirectly  through  the  intermediate  stages  of 
plant  and  animal  life,  the  crust  itself  supplying  directly  but  a  small 
part  of  our  wants.  In  and  upon  the  earth  is  the  indispensable  water, 
without  which  we  would  promptly  perish.  While  the  more  solid  sub- 
stances of  the  earth's  crust  are  also  directly  available  and  of  great 
value,  as  salt,  building  stones,  and  metals,  we  depend  chiefly  upon 
vegetation  for  our  support.  The  plants  grow  from  the  soil.  We  eat 
them  or  clothe  ourselves  with  their  fibers,  cut  them  into  pieces,  shape 
them  into  tools,  and  build  our  houses  and  barns,  extract  their  juices 
and  dig  their  roots  for  drugs  and  medicines.  We  burn  them  for  fuel, 
shape  them  into  articles  of  luxury,  and  thus  make  them  help  in  the 
supply  of  some  of  the  wants  of  each  of  the  six  classes.  The  animals 
in  turn  eat  the  plants  and  each  other,  and  furnish  us  their  meat  and 
milk  as  nourishment ;  their  wool  and  furs  become  our  clothing,  their 
tougher  hides  make  our  shoe  leather,  the  tents  of  the  nomad,  and  the 
belts  of  the  engine  wheel,  while  the  cultural  services  are  hinted  by  the 
soft  leather  bindings  of  our  choicest  books."  ^ 

Labor  power  is  useful  in  active  adaptation.  —  A  second  means 
or  resource  which  is  of  great  consequence  is  the  labor  power  of 
all  of  us.  Labor  has  been  defined  in  various  ways,  most  of 
which  mean  much  the  same  thing.  It  has  been  defined  as  "  all 
wealth-creating  effort."     One  writer  defines  labor  by  saying 

'  J.  Russell  Smith,  Industrial  and  Commercial  Geography,  Ch.  I,  p.  3. 


SOCIAL  RESOURCES  AND  ORGANIZATION  15 

"  Labor  is  the  application  of  human  faculties  to  the  production 
of  wealth."  ^  Another  writer  says:  "  Labor  is  the  voluntary 
exertion  of  bodily  or  mental  faculties  for  the  purpose  of  produc- 
tion." 2  These  definitions  all  mean  much  the  same  thing  and  we 
may  consider  labor  simply  as  mental  or  physical  effort  which 
is  devoted  to  the  creation  of  wealth  or  services. 

If  we  think  of  society  as  a  whole,  there  is  a  great  deal  of 
labor  power  at  its  command.  Nearly  all  of  us  can  do  some 
form  of  work,  and  when  we  think  of  the  work  that  all  of  us 
together  can  do  in  attacking  natural  resources  and  making 
them  over  into  want-gratifying  goods,  we  realize  how  important 
a  resource  is  our  total  amount  of  labor  power. 

Of  course  the  labor  power  of  different  individuals  varies 
greatly  —  some  can  do  almost  any  kind  of  work  and  some  can 
do  much  more  than  others.  The  following  are  among  the 
qualities  determining  the  amount  of  labor  power  which  one 
individual  possesses :  (1)  health,  (2)  physical  strength  and  en- 
durance, (3)  intelligence,  (4)  judgment,  (5)  ambition,  (6)  energy, 
(7)  perseverance,  (8)  imagination.^ 

Capital  aids  in  active  adaptation.  —  Fortunately,  we  are  not 
compelled  to  attempt  to  turn  natural  resources  into  want- 
gratifying  goods  with  our  bare  hands.  Man  has  accumulated 
a  great  many  tools,  machines,  and  implements  which  we  can 
use  in  this  work.  Just  as  a  pioneer  had  his  team,  his  plow, 
and  other  simple  tools,  so  now  there  is  available  a  tremendous 
stock  of  "  implements  of  production."  Railroads,  factories, 
warehouses,  and  stores  are  all  implements  which  we  use  in  our 
task  of  gratifying  wants.  All  of  these  implements  which  we 
have  made  in  the  past  and  now  use  to  help  us  produce  more 
wealth  are  called  capital  goods  or  production  goods,  or  producer's 
goods.  They  are  goods  which  we  have  produced  with  past 
effort  and  which  we  do  not  consume  in  gratifying  wants  directly, 
but  use  to  help  produce  other  goods.  Steamboats,  plows,  buzz 
saws,  hoes,  wheel  barrows,  automobile  trucks,  and  street  car 

'  A.  S.  Johnson,  Introduction  to  Economics,  Ch.  X.  '  N.  W.  Senior,  Political  Economy. 

'  Compare  Seager,  Principles  of  Economics,  Ch.  IX. 


16  OUR  ECONOMIC   ORGANIZATION 

lines  are  all  examples  of  capital.  Capital  is  now  used  in  the 
production  of  almost  everything  that  we  consume. 

Acquired  knowledge  helps  in  our  active  adaptation.  —  If  a 
pioneer  who  had  settled  in  the  agricultural  area  of  our  great 
West  had  not  learned  to  farm  before  making  his  settlement, 
he  would  have  had  a  hard  time  of  it  indeed.  In  point  of  fact, 
these  settlers  knew  how  to  operate  farms  and  were  able  to  do 
rude  carpenter  and  mechanical  work.  This  acquired  knowl- 
edge was  for  them  a  very  important  asset.  Their  acquired 
knowledge  was,  however,  no  more  important  to  them  than  is 
ours  to  us.  For  example,  when  we  wish  to  build  a  factory,  it 
is  not  necessary  to  spend  effort  and  material  in  experimenting 
and  learning  how  such  a  building  can  be  constructed.  We 
have,  in  the  past,  learned  a  great  deal  about  the  best  way  to 
build  factories  and  we  can  now  call  upon  this  acquired  knowl- 
edge at  a  moment's  notice.  The  same  fact  holds  true  if  we 
wish  to  construct  a  railroad,  run  an  engine,  or  open  and  operate 
a  mine.  We  do  not  have  to  learn  how  to  do  these  things  from 
the  beginning,  and  this  fact  enables  us  to  secure  want-gratifying 
goods  more  easily. 

It  is  difficult  to  overestimate  the  importance  of  all  this 
acquired  knowledge.  Think,  for  example,  of  our  knowledge  of 
arithmetic.  By  means  of  this  science  we  are  able  to  cal- 
culate the  least  expensive  methods  in  producing  goods.  Think 
of  language.  How  much  more  difficult  would  it  be  to  carry 
on  our  work  of  producing  goods  if  we  had  not  acquired  from 
the  past  a  language  in  which  we  can  talk  to  one  another  so 
that  we  are  understood  !  Of  equal  importance  is  the  fact  that 
we  have  learned  to  convey  our  ideas  to  one  another  through 
writing.  Suppose  an  Englishman,  a  Spaniard,  an  Eskimo, 
and  a  Turk,  none  of  whom  knew  the  language  of  any  of  the 
others,  should  try  to  cooperate  in  building  a  house  or  running 
a  factory.  How  their  work  would  be  handicapped  by  the 
fact  that  they  could  neither  speak  nor  write  to  one  another ! 

In  addition  to  these  computing  and  communicating  aids  a 
great  realm  of  scientific  knowledge  covering  physics,  chemistry, 


SOCIAL   RESOURCES   AND  ORGANIZATION  17 

biology,  the  earth  sciences,  is  at  our  disposal.  We  can  perhaps 
best  appreciate  the  significance  of  our  acquired  knowledge  if 
we  try  to  picture  our  sorry  plight  if  it  were  lacking. 

Society's  resources  are  somewhat  like  those  of  a  factory 
owner.  —  We  can  better  understand  the  use  of  society's  re- 
sources in  the  active  adaptation  struggle  if  we  compare  the 
situation  with  that  of  a  factory  manager.  The  owner  of  a 
factory  walking  through  his  plant  might  say,  "  These  raw 
materials  in  my  storeroom  form  one  of  the  assets  which  I  can 
use  in  making  the  products  I  desire.  These  machines  are 
another  of  my  assets.  The  men  who  work  for  me  are  the 
labor  power.  These  workmen  have  knowledge  of  their  trades 
and  I  myself  have  knowledge  of  the  operation  of  this  business. 
All  together  these  raw  materials,  this  capital,  this  labor,  and 
our  knowledge  are  the  means  or  resources  or  materials  from 
which  I  can  manufacture  finished  products."  In  the  same 
way  natural  resources,  labor  power,  capital  goods,  and  ac- 
quired knowledge  are  resources  which  man  uses  in  his  efforts 
to  gratify  his  wants. 

It  should  be  noted  that  these  resources  are  by  no  means 
unlimited.  It  is  obvious  that  there  is  a  limited  amount  of 
good  soil,  coal,  iron  ore,  and  timber  in  the  world.  There  is 
also  only  a  limited  amount  of  labor  power  and  capital.  Our 
acquired  knowledge  is  limited  —  sadly  limited  we  sometimes 
think.  These  facts  may  make  it  difficult  for  us  to  secure 
everything  we  want,  especially  since  our  wants  are  so  numerous. 

An  economic  organization  is  useful.  —  How  a  group  of 
people  might  organize  for  the  task  of  producing  want-gratifying 
goods  from  its  social  resources  may  be  shown  by  a  simple  illus- 
tration. 

Suppose  that  all  the  people  in  our  class  should  be  shipwrecked 
on  an  island  and  knew  that  there  was  no  chance  of  getting  off 
for  twenty  years.  No  one  else  is  living  or  has  ever  lived  on 
this  island  and  we  are  dependent  on  ourselves.  The  island  is 
fertile,  has  good  climate,  plenty  of  rainfall,  all  sorts  of  natural 
resources.     From  the  wreck  we  have  saved  some  tools  and 


18  OUR  ECONOMIC   ORGANIZATION 

utensils.  We  have  a  certain  amount  of  acquired  knowledge. 
Under  such  conditions  how  would  we  undertake  the  task  of 
gratifying  wants? 

There  are,  of  course,  several  ways  in  which  we  might  do  it. 

1.  Each  person  might  go  apart  from  the  others  and  set  about 
the  task  alone.  He  would  attempt  to  find  or  produce  all  of 
the  things  that  he  wanted  to  eat  and  wear  or  use  in  any  other 
way  to  gratify  his  wants.  If  it  were  done  in  this  way,  no 
person  would  be  cooperating  with  any  of  the  others.  Each 
would  be  in  somewhat  the  same  situation  as  a  family  on  the 
frontier  —  self -dependent  and  self-sufficing. 

2.  On  the  other  hand,  a  council  might  be  called  and  it  might 
be  agreed  that  all  should  cooperate  in  producing  economic 
goods.  The  form  of  cooperation  might  be  such  that  all  would 
work  at  every  job.  All  would  work  together  in  hunting,  then 
in  fishing,  and  then  in  helping  to  raise  crops. 

3.  A  different  form  of  cooperation  might  be  decided  upon. 
A  central  committee  might  be  appointed  to  determine  what 
specialized  work  each  one  should  do.  This  committee  might 
have  power  to  require  certain  ones  to  fish,  others  to  hunt, 
others  to  work  in  the  fields.  All  the  finished  products  might 
be  turned  into  a  common  fund  or  reservoir.  A  common  din- 
ing-room might  take  care  of  the  wants  of  all  for  food.  Clothes 
might  be  distributed  from  the  central  storehouse.  The  govern- 
ing committee  would  be  required  to  be  careful  to  have  enough 
on  hand  to  supply  the  necessities  before  luxuries  were  con- 
sidered. Such^  a  community  would  be  called  a  communistic 
society.  It  would  be  very  much  like  the  one  which  was  used 
at  one  time  by  the  colonists  who  settled  in  Virginia.  All  of 
the  activities  of  the  members  of  the  colony  were  under  the 
control  of  authorities.  "  Whatever  the  settlers  produced  went 
to  the  common  stock,  while  they  were  fed  and  clothed  from 
the  company's  store  house."  ^ 

4.  A  fourth  plan  might  be  to  allow  each  person  to  pro- 
duce anything  he  thought  was  needed  and  to  trade  or  bar- 

•  Channing,  History  of  the  United  States,  Vol.  I,  p.  183. 


SOCIAL   RESOURCES  AND  ORGANIZATION  19 

ter  with  the  others  for  things  which  they  had  produced. 
Under  such  an  arrangement,  the  person  who  fished  might 
barter  fish  for  game,  the  hunter  might  barter  game  for  fish 
and  grain,  while  the  ones  who  had  raised  crops  would  be  anxious 
to  exchange  their  crops  for  meat  and  fish.  Would  not  such  a 
plan  be  somewhat  like  the  one  we  use  at  present  ? 

These  are  only  a  few  of  the  possible  forms  or  methods  of 
economic  organization.  No  matter  what  form  may  be  in  use, 
the  situation  may  be  illustrated  by  the  following  diagram : 


Social  Resources 

1.  Natural  Resources 

2.  Labor  Power 

3.  Capital 

4.  Acquired  Knowledge 


are  , and  we  ac- 

quire, to 


brought       Economic 
together  Organization 
in  an 


apply  to 
our  wants, 


Economic  Goods 

1.  Wealth 

2.  Services 


The  economic  organization  or  economic  system  which  is 
used  in  our  society  to-day  might  very  sensibly  be  spoken  of 
as  our  want-gratifying  machine.  No  one  could  draw  a  picture 
of  this  machine.  If  we  tried  to  name  its  parts,  we  should  no 
doubt  think  of  laws,  banks,  factories,  labor  unions,  contracts, 
schools,  transportation  systems,  private  property,  competition, 
employers'  associations,  chambers  of  commerce,  specialization, 
insurance  companies,  inheritance,  wages,  interest,  profits,  and 
many  other  institutions.  We  need  not  be  surprised  if  the  out- 
lines of  this  want-gratifying  machine  are  not  very  clear  in  our 
minds  at  this  time.  Throughout  this  entire  book  we  shall  be 
studying  how  this  want-gratifying  machine,  our  economic 
organization,  is  put  together,  what  its  various  parts  are,  what 
tasks  or  functions  it  performs. 

Is  our  economic  organization  orderly  or  chaotic  ?  —  Some 
persons  believe  that  there  is  very  little  system  and  plan  to 
our  economic  organization.  They  can  see  nothing  in  it  but 
planlessness  and  conflict.  These  persons  sometimes  talk  of 
our  whole  system  as  a  wild  scramble  in  which  every  one  is 
trying  to  get  the  best  of  every  one  else  without  other  thought 
or  consideration.     They   declare  that   we   have   nothing  but 


20  OUR   ECONOMIC    OROANTZATION 

irregularity,  waste,  and  a  hectic  struggle  for  existence.  On 
the  other  hand,  a  larger  number  of  observers  point  out  that 
there  is  a  great  deal  of  plan,  method,  and  system  in  our  eco- 
nomic organization.  One  writer  says  that  if  we  imagine  a 
committee  on  a  distant  planet  looking  at  the  world  with  a  gigan- 
tic telescope  and  reporting  what  they  saw  they  would  not 
report  our  efforts  to  get  a  living  as  a  wild,  disordered  rout. 
"  They  would  be  much  more  likely  to  report  that  they  had 
seen  a  very  orderly  people  cooperating  on  the  whole  with  a 
wonderful  absence  of  friction,  that  they  had  seen  them  come 
out  of  their  homes  in  the  morning  in  successive  batches  and 
wend  their  way  by  all  sorts  of  means  of  locomotion  to  in- 
numerable different  kinds  of  work,  all  of  which  seemed  to  fit 
somehow  into  each  other  so  that  as  a  whole  the  vast  popula- 
tion seemed  to  get  fed,  clothed,  and  sheltered.  They  would 
not,  of  course,  vouch  for  the  perfection  of  the  arrangements. 
They  would  see  that  there  were  occasional  irregularities  and 
hitches.  They  might  see  now  and  then  too  many  vehicles 
in  one  street,  too  many  passengers  trying  to  travel  by  one 
train  or  tramcar.  They  might  be  able  to  see  that  some  had 
too  much  —  more  than  they  seemed  to  know  how  to  dispose 
of  without  hurting  themselves  and  others  —  while  some  evi- 
dently had  too  little  for  healthy  and  happy  existence.  But 
in  spite  of  these  defects,  they  would  report,  I  think,  that  on 
the  whole  the  machinery,  whatever  its  exact  nature,  seemed 
to  do  its  work  fairly  effectively."  ^ 

Our  economic  organization  is  ever  changing.  —  The  economic 
organization  which  exists  to-day  is  very  different  from  that  which 
existed  in  the  time  of  our  great-grandfathers,  or  even  of  our 
grandfathers  or  fathers.  In  other  words,  economic  organization 
is  a  dynamic  and  not  a  static  thing.  It  is  changing  before  our 
very  eyes,  but  the  changes  are  not  always  easy  to  see.  It  has 
grown  to  be  a  ver}^  complicated  organization.  Indeed  it  is  so 
complicated  that  it  is  difficult  to  see  it  clearly  and  understand 
it  thoroughly  unless  we  go  back  in  history  and  see  it  in  its 

«  Edwin  Cannan,  Wealth,  pp.  72-70. 


SOCIAL   RESOURCES   AND  ORGANIZATION  21 

simpler  form  and  notice  some  of  the  more  important  changes 
which  it  has  undergone  in  the  years  past.  This  will  justify 
us  in  devoting  the  next  few  studies  to  the  past, 

PROBLEMS 

1.  The  number  of  wants  that  the  people  of  a  country  will  have 
satisfied  depends  on  the  natural  resources  of  the  country  that  they  in- 
habit.    Is  this  statement  true  ? 

2.  Is  the  following  statement  more  true  than  No.  1  ?  The  number 
of  wants  that  a  people  will  have  satisfied  depends  on  the  natural  re- 
sources of  their  country  and  their  own  ability  to  turn  these  natural 
resources  into  want-satisfying  goods. 

3.  Do  we  raise  reindeer  or  camels  in  the  United  States?  If  not, 
why  not  ? 

4.  "The  larger  the  geographic  base,  the  greater  variety  of  cUmate 
and  resources  that  it  offers,  the  more  varied  and  secure  wiU  become  the 
connections  of  a  people  with  the  land  on  which  they  live."  Explain 
this  statement.     Give  illustrations. 

5.  It  is  a  so-called  "law"  of  the  location  of  cities,  that  cities  grow 
at  points  of  break  in  transportation ;  that  is,  where  goods  or  people  are 
transferred.  Can  you  see  anytliing  tending  to  prove  this  law  in  the 
growth  of  such  commercial  cities  as  New  York,  Cliicago,  St.  Louis, 
Kansas  City,  San  Francisco  ? 

6.  If,  in  your  town,  the  street  cars  stopped  before  crossing  the 
street,  on  which  of  the  four  corners,  other  tilings  being  equal,  would 
you  prefer  to  locate  a  drug  store  or  a  news  stand?  Is  your  town  or 
city  at  a  break  in  a  transportation  route?  Are  any  important  stores 
in  your  town  at  breaks  in  transportation  ? 

7.  Can  you  give  examples  of  an  industry  pecuharly  dependent 
upon  gravitation?  Of  one  dependent  upon  rain,  wind,  sunshine,  tide, 
moisture,  temperature,  quahties  of  soil  ? 

8.  Do  you  know  any  regions  where  the  natural  resources  are  so 
limited  that  people  cannot  readily  get  the  means  of  li\ang?  For  the 
people  of  a  certain  region  to  have  a  good  living,  is  it  necessary  for  the 
natural  resources  of  that  very  region  to  supply  them  with  all  the  things 
they  use? 


22  OUR   ECONOMIC   ORGANIZATION 

9.  Can  you  cite  specific  ways  in  which  natural  conditions  have 
affected  the  industry  of  Michigan,  Greenland,  Egypt,  Central  America? 

10.  "The  man  in  a  ship  at  sea  or  in  a  steel  skyscraper  in  a  modern 
city  gets  his  sustenance  from  the  soil  just  as  surely  as  does  the  farmer 
who  takes  potatoes  from  the  furrow."     Is  this  statement  true? 

11.  Draw  up  a  defijaition  of  labor  as  that  word  is  used  in  this  lesson. 
Cite  ten  cases  of  primarily  physical  labor.  Ten  cases  primarily 
mental. 

12.  Would  the  coming  of  immigrants  increase  the  amount  of  labor 
power  of  a  community?  What  are  some  other  ways  in  which  the 
amount  of  labor  power  of  a  community  may  be  increased  ? 

13.  Is  ability  to  tliink  a  mental  quality?  Can  you  name  other 
mental  qualities?  Who  looks  after  the  mental  qualities  of  people? 
Is  honesty  a  moral  quality?  Who  looks  after  the  moral  qualities  of 
people  ? 

14.  Can  you  see  any  reasons  why  it  is  worth  while  for  our  states  to 
provide  education  at  public  expense  ?  What  are  some  of  the  courses  in 
your  school  especially  helpful  in  training  students  to  do  efficient  work 
after  they  leave  school  ? 

15.  Look  up  the  word  "caste."  Would  such  a  social  condition  as  a 
caste  system  promote  efficiency  among  workers?  Would  a  condition 
of  great  general  poverty?  Cite  some  social  conditions  in  the  United 
States  which  promote  efficiency  in  its  workers.  Some  which  lower 
efficiency. 

16.  Can  you  show  any  way  in  which  individual  efficiency  might  be 
increased  or  lowered  by  public  parks?     Bathing  beaches?     Churches? 

17.  Can  you  determine  which  is  more  important,  natural  resources 
or  labor?  Moral  quaUties  or  mental  quafities?  Individual  health  or 
social  conditions  ? 

18.  Make  a  list  of  ten  kinds  of  capital  other  than  those  mentioned. 
What  is  another  name  for  capital  ? 

19.  Make  an  estimate  of  the  comparative  efficiency  of  a  man  picking 
apples  without  tools  and  of  one  equipped  with  such  simple  tools  as  a 
pail  and  a  ladder.  Give  five  other  illustrations  of  the  great  usefulness 
of  capital  in  production  of  consumable  wealth. 

20.  Make  a  list  of  things  that  are  clearly  capital.  Of  those  clearly 
not  capital. 


SOCIAL   RESOURCES  AND  ORGANIZATION  23 

21.  Give  five  illustrations  other  than  those  in  the  text,  of  knowledge 
that  society  has  acquired  in  the  past  which  it  can  use  in  its  work  of 
gratifying  wants. 

22.  If  each  generation  as  it  died  carried  with  it  all  the  knowledge 
that  it  had  acquired,  do  you  think  our  task  of  gratifying  wants  would 
be  more  difficult  ?  Is  a  school  an  institution  that  helps  us  to  transmit 
acquired  knowledge  from  generation  to  generation?  Can  you  name 
any  other  devices  that  aid  in  retaining  society's  supply  of  acquired 
knowledge  ? 

23.  Do  many  of  us  secure  everything  we  want  ?     Why  or  why  not? 

24.  What  are  the  more  important  factors  in  determining  whether 
mankind  will  have  an  easy  or  a  difficult  "struggle  with  nature"? 

25.  Do  people  of  this  country  gratify  their  wants  from  the  resources 
of  this  country  or  from  the  resources  of  the  world  ? 

26.  Will  a  pioneer  be  in  a  better  position  to  gratify  the  wants  of  his 
family  if  his  family  consists  of  small  children  ?  Will  he  be  better  off, 
perhaps,  if  these  children  are  all  strong,  well-grown  boys?  Does  it 
seem  to  you  that  the  size  of  the  population,  as  compared  with  the 
amount  of  its  resources,  has  anything  to  do  with  the  number  of  wants 
that  we  may  be  able  to  gratify?  Will  the  composition  of  the  popula- 
tion, that  is,  the  proportion  of  men,  women,  and  children,  make  a 
difference  ? 

27.  Set  down  in  writing  several  different  ways  that  we  might 
organize  to  gratify  our  wants  if  we  were  shipwrecked  on  a  fertile  island. 
Would  we  still  have  the  same  basic  problem  of  gratifying  our  wants, 
no  matter  what  method  we  used  ? 

28.  Did  the  American  Indians,  who  lived  here  before  the  white  man 
came,  have  an  economic  organization?  Was  it  more  simple  or  more 
complex  than  ours  ?  Was  there  an  economic  organization  at  the  time 
of  Abraham? 

29.  What  is  the  purpose  of  an  economic  organization,  no  matter 
what  methods  constitute  it? 

30.  Is  the  clothing  supply  in  your  town  fairly  regular?  Is  this  an 
example  of  regularity  or  chaos  in  our  want-gratifjing  machine?  Give 
five  other  illustrations  of  order  in  our  economic  organization. 

31.  "Our  economic  organization  is  one  of  system  and  structure. 
We  might  well  speak  of  its  parts  and  their  workings  as  the  structure 


24  OUR   ECONOMIC   ORGANIZATION 

and  functioning  of  industrial  society."     Does  this  seem  to  you  a 
sensible  statement  ? 

32.  K  we  think  of  our  economic  organization  as  a  want-gratifying 
machine,  we  may  think  of  factories,  laws,  railroads,  labor  unions, 
schools,  banks,  and  other  forms  of  business  activitj^  as  wheels  or  parts 
of  the  machine.  Have  all  these  parts  alwa>'S  been  the  same?  Give 
five  illustrations  of  "wheels"  in  the  modern  want-gratifying  machine 
which  were  not  there  at  the  time  of  Noah. 

33.  When  a  man  or  boy  hunts  for  a  job  is  he  trying  to  find  his  place  in 
the  economic  organization? 

34.  If  a  boy  wants  to  play  half-back  on  the  football  team,  does  he 
have  to  know  half-back,  or  football,  or  both?  If  he  wants  to  succeed 
in  some  Une  of  business  or  professional  work  is  there  any  reason  to 
believe  his  chances  will  be  better  if  he  understands  the  economic  or- 
ganization as  a  whole,  as  well  as  the  one  line  of  business  in  which  he 
is  working  ? 

35.  .J\Iake  an  outline  of  the  main  points  in  this  lesson.  Be  sure 
your  outline  contains  a  carefully  worded  definition  of  every  new  term 
used  in  the  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Indudrial  Society:  pp.  3-9,  and  Selections  11, 
12,  13,  14,  4,  7,  8,  9,  10. 
Bureau  of  Education,  Lessons  in  Communiti)  and  National  Life: 
Series  A,  Lesson  A-4,  Goode,  "  What  Nature  Has  Done  for  a 
Typical  City." 
Lesson  A-5,  Reticker,  "The  Human  Resources  of  a 

Community." 
Lesson  A-6,  Mnrshall,  "Capital." 
Lesson  A-7,  Lyon,  "  Organization." 


STUDY   III 

THE  FUNCTIONING  STRUCTURE   OF   MEDIEVAL 
INDUSTRIAL  SOCIETY 

A.     The  Self-Sufficing   Medieval   English   Manor 

PURPOSES  OF  THIS  STUDY: 

L   To  see  how  wants  were  gratified  when  conditions  were  simpler  than 

they  are  now. 
2.   To  make  some  comparisons  between  early  and  modem  methods. 

The  plan  of  the  next  six  chapters.  —  In  our  introductory 
studies  we  saw  that  nature  does  not  provide  us  freely  with  many 
of  the  things  we  use  to  gratify  our  wants.  As  a  result  of  this, 
man  engages  in  active  adaptation^ — he  produces  wealth  and  serv- 
ices. Our  present  method  of  producing  these  desired  economic 
goods  by  using  natural  resources,  labor,  acquired  knowledge, 
and  capital,  is  not  easy  to  understand  because  our  economic 
organization  has  become  very  complex  and  involved.  A  few 
centuries  ago  it  was  comparatively  simple.  Since  our  present 
organization  is  nothing  more  than  the  old  organization  changed, 
added  to,  and  grown  larger,  we  can  get  a  great  deal  of  help  in 
understanding  our  present  want-gratifying  machine  by  examin- 
ing its  structure  in  the  days  of  its  simpler  form. 

We  could  find  in  the  economic  history  of  almost  any  country 
a  situation  that  would  be  useful  for  our  purposes.  But  we 
shall  examine,  in  preference  to  others,  the  want-gratifying 
organization  of  medieval  England.  There  are  several  reasons 
why  this  is  a  good  period  for  us  to  study  and  why  England  is  a 
good  country  to  use  Ln  this  connection.  To  begin  with,  the 
methods  of  gratifying  wants  in  medieval  England  were  suffi- 
ciently simple  to  serve  our  purposes  well.     Furthermore,  at 

25 


26  OUR  ECONOMIC   ORGANIZATION 

that  time  many  of  the  factors  which  are  most  important  to  us 
to-day  were  just  in  the  process  of  emerging.  We  can  accord- 
ingly see  them  in  their  beginnings.  Finally,  in  addition  to  these 
reasons  for  the  time  chosen  for  study,  we  center  our  attention 
on  England  rather  than  on  any  other  country  because  many 
of  our  methods,  habits,  customs,  and  institutions  have  been 
taken  from  that  country.  Our  economic  organization  is  in 
many  respects  a  sort  of  descendant  of  that  of  the  mother  country. 

In  our  examination  of  the  structure  of  medieval  English  in- 
dustrial society  we  shall  not  attempt  to  see  everything  at  once. 
We  shall  make  our  work  easier  and  also  more  useful  by  consider- 
ing first  the  organization  for  agriculture,  second  the  organiza- 
tion of  the  town  for  manufacturing,  third  the  organization  for 
commerce,  and  finally  some  of  the  changes  which  resulted  in 
medieval  organization  assuming  the  present  form.  It  will  not 
be  a  study  of  medieval  history.  We  shall  be  interested  in  the 
facts  of  medieval  society  only  to  the  extent  that  the  facts  are 
of  service  in  making  clear  to  us  the  structure,  the  organization, 
the  functioning  of  that  society.  We  shall  be  particularly  in- 
terested in  the  structures,  the  organizations,  and  the  institutions 
which  were  the  germs  of  present  structures,  organizations,  and 
institutions ;  or,  on  the  other  hand,  in  those  which,  by  con- 
trast, will  serve  as  a  foil  better  to  display  present  features. 

The  vill  or  manor  and  its  layout.  —  A  large  part,  perhaps  nine 
tenths,  of  the  people  of  medieval  England  lived  in  the  country 
and  got  their  living  from  working  the  land.  A  view  of  the 
country,  however,  would  have  shown  an  entirely  different  picture 
from  that  presented  by  a  glimpse  of  a  rural  landscape  to-day. 
To-day  we  see  scattered  farm  houses  surrounded  by  farms 
of  varying  sizes,  an  occasional  little  town  at  some  favorable 
point,  such  as  where  a  country  road  crosses  a  railroad.  In 
medieval  England  one  would  have  seen  a  number  of  large, 
poorly  kept  estates,  made  up  partly  of  cultivated  fields  and 
partly  of  waste  land.  Commonly  they  did  not  adjoin,  but  were 
separated  by  many  miles  of  rough,  unused,  uninhabited  land, 
open  stretches  of  heath,  or  dense  forest.     There  were  no  scat- 


STRUCTURE    OF  MEDIEVAL   INDUSTRIAL   SOCIETY     27 

tered  farm  houses  even  on  the  estates.  The  houses  of  all  the 
inhabitants  were  grouped  together  in  a  little  village,  or  vill  as 
it  was  called,  containing  on  the  average  about  one  hundred 
and  fifty  persons. 

This  vill  was  very  different  from  the  Uttle  country  town  of 
to-day.  It  was  entirely  an  agricultural  community.  As  re- 
gards its  buildings,  two  were  hkely  to  be  somewhat  prominent : 
the  manor  house  of  the  lord  who  held  the  entire  estate  from  some 
overlord  —  perhaps  from  the  king ;  and  the  church  that  was 
sometimes  used  for  a  hall  or  a  market-place.  Certain  other 
buildings  might  or  might  not  be  different  from  the  rest.  Gen- 
erally there  was  a  mill  on  the  stream  which  ran  through  the 
vill,  and  sometimes  there  was  to  be  found  the  shop  of  a  black- 
smith or  the  house  of  a  weaver  or  carpenter.  But  there  was 
nothing  like  our  modern  stores  and  shopkeepers.  Every  vill 
would  vary  somewhat  in  its  plan  of  layout  and  its  buildings, 
but  the  following  description  will  help  us  picture  one. 

"The  houses  of  these  villages  were  poor  and  dirty,  not  always  made 
of  stone,  and  never  (till  the  fifteenth  century)  made  of  brick,  but  built 
of  posts  wattled  and  plastered  with  clay  or  mud,  with  an  upper  story 
of  poles  reached  by  a  ladder.  The  articles  of  furniture  would  be  very 
coarse  and  few,  being  necessarily  of  home  manufacture ;  a  few  rafters 
or  poles  overhead,  a  bacon-rack,  and  agricultural  tools  being  the  most 
conspicuous  objects.  CHnmeys  were  unknown,  except  in  the  manor- 
houses,  and  so  too  were  mndows,  and  the  floor  was  of  bare  earth. 
Outside  the  door  was  the  'mixen,'  a  collection  of  every  kind  of  manure 
and  refuse,  which  must  have  rendered  the  village  street  alike  un- 
savoury, imsightly,  and  unwholesome."  ^ 

Open  field  system  used.  —  The  cultivated  lands  of  the  manor 
lay  spread  about  the  village  in  broad  open  fields.  This  is  called 
the  open  field  system.  In  some  parts  of  England  there  was 
one  open  field,  in  others  two  open  fields,  in  still  others  three  or 
more.  A  description  of  the  three-field  system  will  serve  our 
purposes.  Under  this  plan  the  entire  area  of  cultivated  land 
was  divided  into  three  large  fields.     During  each  year  one  of 

•  Adapted  from  H.  de  B.  Gibbins,  Industry  in  England,  pp.  80-85. 


28 


OUR   ECONOMIC   ORGANIZATION 


the  three  fields  would  lie  fallow,  resting.  Another  one  would  be 
sown  to  some  crop  which  would  be  planted  in  the  fall  and  har- 
vested the  following  summer.    The  third  field  would  be  planted  in 


tYorn  Henry  AUsop's  An  IMrodiicllon  to  English  Indvslrlal  History,  published  by  G.  Bell  and 

Sons,  Ltd. 

A  Diagram  of  a  Manor 

Suggestion  of  village  with  tlireo  fields  divided  into  furlongs  and  acres; 
the  30  black  acres  represent  one  virgate. 

A.  A.  Tenants'  messuages  E.  E.  Wood  and  rough  pasture 

B-  B.   Natural  meadow  F.  F.  Roads 

C.         Hall  and  fhun^h  G.  G.  Stream 


the  spring  and  reaped  in  the  autumn.  Each  succeeding  year  the 
fields  were  rotated  with  respect  to  the  use  made  of  them.  The 
variety  of  crops  was  small  and  the  yield  was  light  compared  with 
that  which  we  secure  nowadays.  Oats,  wheat,  rye,  barley,  and 
peas  were  the  crops  which  historians  mention  most  frequently. 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY      29 

Each  of  these  fields  was  divided  into  long  narrow  strips  a  fur- 
long (furrow-long)  or  forty  rods  in  length,  and  wide  enough  to 
make  the  area  of  the  strip  a  quarter  acre,  a  half  acre,  or  perhaps 
more  frequently  an  acre.  These  strips  lay  side  by  side,  separated 
by  what  was  called  a  balk.  This  might  be  a  narrow  width  of 
unplowed  land,  a  division  marked  by  grass  or  stones  or  two 
furrows  thrown  together.  The  strips  of  one  field  were  not  al- 
ways parallel.  One  group  of  strips  might  be  at  a  sharp  angle 
to  another  group.  The  way  in  which  the  land  lay  or  was  cut 
by  streams  or  hills  had  much  to  do  with  the  way  in  which  these 
groups  of  strips  were  related  to  each  other.  Often,  however, 
there  was  apparently  no  reason  for  the  way  in  which  the 
strips  were  laid  out  other  than  the  custom  of  the  manor. 

Tenants  held  land  in  scattered  strips.  —  Now  in  all  the  groups 
of  strips  lying  in  several  fields,  where  was  the  holding  of  any 
one  tenant?  Not  in  any  one  place.  It  was  distributed  over 
all  the  fields  and  his  strips  were  not  side  by  side.  In  the  open 
fields  of  the  manor  divided  in  this  way,  how  could  a  tenant  tell 
what  he  held  and  what  he  did  not  hold?  Undoubtedly  there 
was  difficulty  at  times.  But  custom,  running  from  time  im- 
memorial, was  the  guide,  and  gave  rights  and  title  to  the  various 
tenants.  The  holding  of  a  villain  was  likely  to  be  about  thirty 
strips  or  acres,  and  was  called  a  virgote.  Sometimes,  however, 
there  were  smaller  holdings  called  half  virgates,  and  quarter 
virgates. 

Scattered  among  all  the  strips  belonging  to  the  tenants  were 
some  belonging  to  the  lord,  and  these  taken  together  with  a 
separate  piece  of  land  which  he  might  have  near  the  manor 
house,  constituted  the  demesne.  Sometimes  a  part  of  the  land 
of  the  lord  or  of  some  tenant  would  be  inclosed  by  a  hedge  or 
fence.     This  was  called  a  close. 

Besides  the  cultivated  fields,  there  was  to  be  found  on  the 
manor  the  covimon  ^pasture  and  the  woodland.  Often  all  the 
tenants  could  make  use  of  the  common  pasture  for  a  limited 
number  of  cattle.  In  the  woods  the  tenant  would  be  likely  to 
have  the  right  to  pick  up  firewood  and  perhaps  to  pasture  swine. 


30  OUR   ECONOMIC   ORGANIZATION 

On  some  manors  there  was  also  meadow  land  where,  for  extra 
payments,  the  tenant  could  secure  the  right  to  a  supply  of  hay. 
Also,  there  was  the  waste.  This  was  rough,  unplowed  land  which, 
usually  for  no  additional  payments,  furnished  to  the  tenants 
turf  and  brush  for  fuel  and  perhaps  some  rough  fodder  for 
cattle. 

Tenant  classes  existed.  —  Not  all  of  the  people  who  lived  on 
the  manor  and  made  a  living  from  the  land  were  of  the  same 
social  class.  There  was,  for  instance,  the  lord  of  the  manor, 
one  of  the  king's  chief  fighting  men,  whose  home  when  he  was 
on  the  vill  was  the  manor  house.  Sometimes  the  lord  con- 
trolled several  manors  and  divided  his  time  among  them.  When 
he  was  absent,  the  manor  house  was  likely  to  be  occupied  by  a 
representative  or  officer  whom  he  left  in  charge.  A  bailiff  and  a 
reeve,  officials  of  the  lord,  took  direct  charge  of  the  work  of  the 
people  of  the  vill  and  were  charged  with  responsibility  if  the 
lord  was  away. 

On  practically  every  manor  there  was  a  small  group  of  people 
called  free  tenants.  They  held  some  land  from  the  lord  for 
which  they  usually  paid  a  small  amount  of  money  at  stated  times. 
Generally,  they  also  gave  the  lord  of  the  manor  some  definite 
services  for  the  use  of  this  land.  These  people  were  free  in 
that  they  could  leave  the  manor  as  they  liked,  and  were  in  no 
sense  bound  to  the  soil. 

The  most  numerous  class  of  tenants  were  those  called  villains. 
They  were  the  holders  of  the  virgates  described  above.  They 
held  this  land  of  the  lord  and  were  related  to  it  in  a  way  some- 
what different  from  anything  we  know  to-day.  Although  the 
medieval  villain  had  property  rights  in  land  and  in  personal 
property,  he  did  not  have  as  many  rights  as  the  modern  farmer. 
The  villain  did  not  own  his  land  in  the  sense  that  he  had  a 
right  to  sell  it,  nor  did  he  rent  it  in  the  sense  in  which  we  use 
the  term.  He  had  a  right  to  use  it  and  to  pass  it  on  to  his  heirs. 
He  had  the  right  to  the  cottage  in  which  he  lived  and  usually 
had  a  claim  on  some  domestic  animals  and  other  personal  prop- 
erty.    But  if  the  villain  had  rights  to  the  land,  the  land  in  a 


STRUCTURE   OF   MEDIEVAL   INDUSTRIAL  SOCIETY     31 

certain  sense  had  rights  to  the  villain.  He  was  hound  to  the 
soil.  He  was  forbidden  to  leave  the  manor  without  the  con- 
sent of  the  lord ;  if  he  did  so,  he  might  be  brought  back  and 
punished.     He  was  only  half  free. 

For  the  enforcements  of  his  rights  the  villain  could  usually 
appeal  to  a  court  called  the  manorial  court  in  which  the  lord  of 
the  manor  or  his  representative  presided,  and  which  was 
usually  the  final  authority.  If  the  complaint  were  a  matter 
of  injury  to  life  or  limb,  he  might  turn  to  the  king's  court  in- 
stead. In  the  manorial  court  the  villain  was  likely  to  find 
security  by  pleading  his  right  by  custom.  If  he  could  plead 
that  it  was  the  custom  to  do  things  in  a  certain  way  and 
if  he  could  show  that  this  had  been  the  custom  from  time  im- 
memorial, he  was  more  than  likely  to  win  his  case,  although  his 
chances  were  not  of  the  best  in  case  his  complaint  was  against 
the  lord. 

It  is  apparent  that  there  were  no  books  of  written  or  statute 
law  to  which  the  villain  could  turn  to  ascertain  his  rights.  He 
had  the  rights  from  established  custom.  This  same  established 
custom  dictated  the  duties  and  obligations  of  the  villain.  These 
were  chiefly  of  three  kinds :  (a)  week-work,  which  was  service 
for  a  certain  number  of  days  each  week  on  the  demesne,  the 
land  of  the  lord,  (6)  boon-work,  which  was  special  service  on 
the  land  of  his  lord  at  special  seasons  of  the  year,  such  as  har- 
vest time,  (c)  payment,  not  in  money  but  in  kind ;  that  is, 
in  products  that  were  raised  on  his  land. 

Another  class  of  tenants  on  the  manor  were  the  cotters. 
The  property  rights  of  the  cotters  were  more  limited  than  those 
of  the  villains.  As  their  name  implies,  they  held  very  little 
except  the  cottage  with  perhaps  sometimes  a  very  small  holding 
of  land.  The  cotters,  frequently  finding  it  difficult  to  make  a 
living  from  the  small  plots  of  land  which  they  held,  formed  a 
class  which  even  in  medieval  times  must  have  been  ready  to 
sell  their  services  to  other  classes  on  the  manor.  They  are  in- 
teresting and  significant  because  we  find  that  later,  when  man- 
orial conditions  changed,  they  were  a  class  from  which  wage 


32  OUR    ECONOMTO    ORdANTZATTON 

laborers,  either  for  farms  or  for  shops  in  the  towns,  could  be  read- 
ily recruited. 

An  idea  of  the  relative  numbers  of  the  various  classes  in 
medieval  England  can  be  secured  from  the  Doomsday  Survey 
of  1086  (a  sort  of  "  census  ")  made  by  William  the  Conqueror. 
The  number  ran  thus  :  ^ 

Gentry  and  clergy,  made  up  of  tenants  in  chief,  under  tenants  9,300 

Free-holder  and  yeoman,  made  up  of  freemen  and  socmen    .  35,000 

Half-free  or  unfree,  made  up  of  villains,  cotters,  and  bordars  .  259,000 

Slaves 25,000 

Farming  methods  used.  —  Typically  no  one  of  these  men  on 
the  manor  worked  his  land  alone.     It  was  a  system  of  what 


Medieval  Plowing 

Wherein  does  this  differ  from  a  plowing  scene  on  a  modern  middle-western 

farm? 

might  be  called  cooperative  farming.  Even  when  the  land  was 
worked  individually  it  had  to  be  thrown  open  for  common  pas- 
ture after  the  crop  had  been  harvested.  Under  such  a  system, 
there  was  not  much  opportunity  for  a  villain  to  experiment 
with  some  new  crop.  He  had  to  fit  in  with  the  work  of  the 
others.  For  example,  he  could  not  plant  a  crop  which  would 
not  be  ready  for  harvesting  for  months  after  the  general  har- 
vest. Such  a  system  did  not  encourage  the  individual  initia- 
tive and  enterprise  which  is  so  characteristic  of  our  agriculture 
to-day. 

Self-sufficiency  of  the  vill.  —  A  large  part  of  the  produce 
that  was  harvested  on  the  manor  was  consumed  by  the  people 

>  Janu'H  U.  TiiftH,  Thf  Ii,al  liusinv^^  of  JAnnij.  \>.  42. 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY     33 

who  raised  it.  The  manor  produced  primarily  for  consump- 
tion; for  its  own  subsistence.  In  some  cases,  however,  there 
must  have  been  a  surplus  which  was  sold.  During  this  medi- 
eval period,  and  especially  during  the  latter  part  of  it,  there 
were  towns  in  England.  It  seems  reasonable  to  believe  that 
for  part  of  their  supplies,  at  least,  these  towns  had  to  rely  upon 
what  the  vills  had  to  sell.  One  historian  of  this  period  even 
states  that,  toward  the  end  of  the  middle  ages,  corn  and  cattle 
in  large  quantities  were  regularly  sent  to  markets  by  the  lords 
and  bailiffs  of  manors.  There  were  many  years,  however, 
when  there  was  no  surplus  and  when  it  was  difficult  to  find 
enough  to  supply  the  inhabitants  of  the  manor  itself.  Rain- 
fall was  not  certain,  land  was  none  too  fertile,  and  it  was  possible 
that  attacks  upon  the  manor  might  despoil  the  crops  or  keep 
the  villains  from  the  fields. 

"  Imports  "  to  the  manor  were  hardly  more  numerous  than 
"  exports  "  from  it.  Some  things,  however,  the  manor  needed 
that  it  could  not  produce.  Perhaps  of  most  importance  was 
salt.  Salted  meat  was  an  important  part  of  the  food  of  the 
manorial  population  during  several  months  of  the  year  and  salt 
was  therefore  a  necessity.  An  occasional  millstone  was  also 
needed,  and  it  is  said  that  the  better  ones  of  these  were  brought 
from  France  with  great  expense  and  labor.  Tar  was  also  in 
demand  as  a  medicine  for  sheep,  and  this  could  be  had  at  the 
towns  to  which  it  was  brought  from  Norway  or  other  countries 
of  the  north.  Iron,  too,  was  bought  at  the  fairs  and  markets, 
for  use  in  making  and  repairing  tools  and  weapons. 

It  is  evident  that  where  trade  was  so  limited  there  would  be 
comparatively  little  need  for  money.  Some  need  there  seems 
to  have  been,  however.  Certain  payments,  especially  of  the 
freemen,  were  made  in  money  and  in  some  cases  money  might 
be  required  of  other  tenants.  The  cotters,  who  apparently 
sold  their  labor  to  other  tenants,  could  have  been  hired  for 
money,  and  it  was  generally  possible  for  a  villain,  if  he  could 
accumulate  sufficient  money,  to  buy  freedom  from  his  customary 
payments  and  duties. 


34  OUR   ECONOMIC   ORGANIZATION 

When  we  remember  that  the  vill  was  frequently  separated 
from  its  nearest  neighbors  by  many  miles  and  by  many  dangers, 
and  that  neighbors  were  more  often  hostile  than  friendly,  it 
becomes  clear  that  its  people  would  grow  to  depend  very  much 
on  themselves.  That  is,  they  would  have  a  tendency  to  become, 
compared  with  local  groups  to-day,  independent  and  self-sufficing. 
All  of  their  interests  would  be  at  home.  They  would  know  and 
care  little  about  what  went  on  in  the  outside  world,  and  if  their 
local  rainfall  was  sufficient  and  local  crops  were  good,  they  would 
probably  have  little  interest  or  little  thought  for  what  might 
happen  elsewhere.  There  would  be  many  reasons  for  the  vill 
to  become,  as  it  has  often  been  called,  a  little  world  in 
itself. 

Economic  organization  of  the  vill.  —  An  economic  organiza- 
tion, or  for  that  matter  any  other  organization,  comes  into  being 
to  meet  a  given  need.  Did  the  vill  meet  the  requirements  of 
the  day?  Did  it  provide  a  means  of  subsistence  and  defense? 
While  it  produced  but  little  food  compared  with  what  we  should 
expect  such  a  great  amount  of  land  to  produce  to-day,  it  at 
least  provided  the  bare  necessities  of  life,  especially  in  favorable 
seasons.  Its  people,  living  close  together,  were  reasonably 
well  prepared  for  defense  against  both  man  and  beast.  Since 
the  manor  house  was  often  a  well-built  fort,  they  could  find  pro- 
tection there  in  case  of  extreme  need.  If  the  lord  of  the  manor 
called  those  of  his  men  who  owed  him  military  service  to  fol- 
low him,  either  in  a  foreign  war,  or  in  a  raid  upon  some  other 
vill,  the  system  of  cooperative  agriculture  made  it  certain  that 
all  the  land  would  get  some  attention  from  those  who  were  left 
behind,  so  that  no  one  would  return  to  find  his  holding  entirely 
neglected.  Did  the  vill  provide  for  the  government  of  its 
members?  We  have  seen  such  provision  in  the  position  of  the 
lord  and  in  the  work  of  his  courts.  The  control  of  the  manor 
was  quite  largely  the  control  of  custom.  Things  were  done  as 
they  had  always  been  done.  Social  habits  were  an  authority 
that  was  not  to  be  questioned. 

We  should  not  expect  the  vill  organization  to  be  free  from 


STRUCTURE    OF  MEDIEVAL   INDUSTRIAL   SOCIETY     35 

difficulties,  measured  by  present  standards.  In  terms  of  our 
standards,  implements  were  crude,  few  crops  were  known, 
farm  animals  were  poor  and  under-sized,  agricultural  methods 
were  unproductive,  and  the  force  of  custom  not  conducive  to 
rapid  progress.  Nevertheless,  measured  by  the  standards  of 
its  own  day,  the  vill  was  a  reasonably  satisfactory  social  in- 
stitution. 

Some  generalizations.  —  Now  that  we  have  seen  something 
of  the  manor  —  its  method  of  operations,  its  scheme  of  organ- 
ization, and  the  people  who  lived  upon  it,  we  are  ready  to  make 
some  generalizations.  Work  through  the  following  statements 
which  bring  out  some  of  the  prominent  characteristics  of  the 
manorial  system : 

1.  "No  intermediaries  existed  in  the  manor  between  producers 
and  consumers."  Explain  this.  Compare  it  with  present  conditions. 
Did  the  villain  talk  about  the  middleman  ? 

2.  "The  members  of  one  group  must  for  the  most  part  produce  their 
own  tools.  They  could  not  rely  on  specialists."  Compare  tliis  with 
present  conditions. 

3.  "The  villain  was  not  a  wage  earner."  What  does  this  mean? 
Have  we  wage  earners  now?  Try  to  state  under  just  what  conditions 
one  can  be  called  a  wage  earner. 

4.  "On  the  manor,  production  was  for  consumption  or  for  stores 
for  use."     What  is  it  for  to-day? 

5.  "The  value  of  anything  on  the  manor  would  have  been  measured 
by  value  in  use,  not  value  in  exchange.'^  In  which  is  it  measured  to-day  ? 
In  which  of  the  two  ways  do  we  measure  the  value  of  things  we  have 
—  say  a  ton  of  hay,  a  carload  of  wheat,  a  horse,  our  skill  in  surgery, 
preaching,  or  laying  bricks? 

6.  "The  manor  was  a  producing  and  a  consuming  community  in 
one."  Is  this  true?  Is  this  statement  true  of  local  communities 
such  as  your  city  nowadays  ?     Is  it  true  of  a  country  town  ? 

7.  "  On  the  manor  payment  was  for  the  most  part  pajonent  in  kind." 
Explain  this.     In  what  is  it  to-day? 

8.  "Change  and  progress  on  the  manor  were  hindered  by  lack  of 
individual  control  of  farming  methods."  Explain.  Who  or  what  did 
control  the  methods?     "Why  should  this  make  any  difference? 


36  OUR   ECONOMIC    ORGANIZATION 

9.  "The  manorial  system  has  been  characterized  by  the  following 
terms:  'joint  husbandry,'  'carried  on  in  common,'  'cooperative  agii- 
culture,'  'local',  'self-sufficing,'  'independent.'  "  Do  you  think  these 
terms  are  to  the  point  ? 

Some  Comparisons  between  the  Vill  and   Modern  Conditions 
IN  American  Agriculture 

MANOR   OR   VII-L  AMERICAN   AGRICULTURE 

Situation  of  agriculturists 
Living  in  a  vill.  Scattered  on  separate  farms. 

Classes  of  people 
Lords,  villains,  freemen,  cotters.         Land-owning  or  renting  farmers. 

Management 

Control  by  custom.  Each  individual  largely  free  to  do 

as  he  pleases  with  the  land. 

Methods 

Customary    cooperative    cultiva-      Experiment,  crop  rotation,  plan- 
tion.  ning  ahead. 

Relations  to  other  people 
Self-sufficient,  isolated.  Dependent,  inter-related. 

System  of  land  tenure 

Customary  holdings  in  land  with      Fee   simple   or   lease   by  definite 
villains  l)ound  to  land.  contract. 

Purpose  of  prodtiction 
For  consumption  —  agriculture        For  market  —  commercial  agricul- 
for  subsistence.  ture. 

Each  side  of  the  above  comparison  represents  certain  char- 
acteristics of  the  two  different  forms  of  economic  organization. 
Work  through  the  comparisons,  making  certain  that  you  know 
the  meaning  of  every  term  used. 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL  SOCIETY     37 

PROBLEMS 

1.  Why  do  we  begin  this  work  with  an  historical  study?  Why  do 
we  begin  at  1100-1300?     Why  not  at  a  period  forty  years  ago? 

2.  Why  use  England  as  a  type  case?  Why  not  Japan?  Russia? 
Portugal?  Spain?  Italy?  Why  not  the  United  States  a  hundred 
years  ago? 

3.  About  nine  tenths  of  the  economic  life  of  medieval  times  was 
in  the  manor  and  about  one  tenth  in  towns.  How  does  this  compare 
^\^th  the  situation  to-day? 

4.  How  is  the  population  of  the  United  States  to-day  divided  be- 
tween city  and  country?     (See  census  reports.^) 

5.  What  is  the  chief  factor  in  determining  for  the  majority  of  the 
people  of  to-day  whether  they  shall  live  in  the  country  or  the  city? 
What  was  it  at  the  time  of  the  manor? 

6.  What  facts  show  you  that  the  public  health  of  the  vill  was  not 
cared  for  adequately  as  judged  by  modern  standards?  Find  out  what 
agencies  look  after  public  health  affairs  in  your  community. 

7.  How  did  the  lord  of  the  vill  get  his  income  ?  Would  he  become 
extremely  rich  from  tliis  income  ?  Why,  or  why  not  ?  How  would  his 
chances  of  accumulating  great  wealth  compare  with  those  of  the  pro- 
prietor of  an  equal  amount  of  land  to-daj^? 

8.  Were  the  \'illains  "wage  earners"  as  we  use  that  term  to-day? 
Explain.     What  advantages  or  disadvantages  did  the  villains  of  that  V 
time  have  as  compared  with  the  unskilled  workman  of  to-day? 

9.  Did  they  know  of  money  in  the  vill?  Were  payments  for  the 
most  part  made  in  money?  Did  the  people  tliink  much  in  terms  of 
money?     Do  you  think  we  could  get  along  without  money  now? 

10.  Were  there  any  "retired  farmers"  or  "retired  villains"  li\ang 
on  their  money?     If  not,  why  not? 

11.  Explain  just  what  you  mean  when  you  say  a  retired  farmer  or 
business  man  of  to-day  is  li\ang  "on  his  money." 

12.  When  practically  all  payments  are  made  in  money  and  people 
think  of  values  largely  in  terms  of  money,  the  economic  organization 
is  said  to  be  on  a  money  basis.     Another  way  of  saying  this  is  to  say 

*  Note  to  teachers :  It  may  be  expedient  to  assign  one  pupil  only  to  questions  (such  as 
this)  which  involve  investigation,  and  to  require  a  report. 


J-  O 


3  8 1  ti  .1 


38  OUR   ECONOMIC   ORGANIZATION 

that  it  is  a  money  economy.     Was  it  a  money  economy  at  the  time  of 
the  vill  ?     Is  it  now  ? 

13.  Did  the  villains  produce  for  gain  ?  Explain.  K  not,  what  for  ? 
Does  the  farmer  of  to-day  produce  for  gain  ?  Does  the  gain  spirit  seem 
to  you  a  strong  driving  force  in  making  people  work? 

14.  "The  manorial  system  was  an  aggregation  of  like  units ;  modern 
business  is  an  integration  of  a  multitude  of  unlike  units  into  a  vast 
and  intricate  system."     Explain. 

15.  "The  relation  of  medieval  lord  and  man  was  a  matter  of  status ; 
that  of  modern  employer  and  employee  is  an  affair  of  contract."  Ex- 
plain,    Consult  a  dictionary  if  necessary. 

16.  Draw  up  a  comparison  of  the  number  and  kind  of  rights  of  the 
medieval  villain  and  those  possessed  by  the  modern  farmer.  Do 
property  rights  ever  change  or  are  they  something  fixed  and  constant  ? 

17.  Do  we  rely  on  custom  to  fit  us  into  our  task  ?  Does  a  farmer's  son 
necessarily  remain  a  farmer  ?     Does  a  landowner  always  remain  one  ? 

18.  "In  the  vill  custom  hardened  into  a  stiff  cake  which  helped  to 
hold  people  firmly  together  but  also  kept  them  from  going  ahead." 
Explain.  Cite  cases  where  it  held  people  together ;  cases  where  it  kept 
them  from  going  ahead. 

19.  Characterize  several  of  your  friends ;  that  is,  think  of  one  and 
indicate  the  characteristics  that  are  most  noticeable  :  thoughtfulness, 
honesty,  stinginess,  sincerity,  kindness,  meanness,  gentleness,  etc. 
Did  you  ever  think  of  characterizing  a  city?  Characterize  your  city 
with  the  one  term  that  you  think  most  expressive  of  it.  In  the  list 
of  characteristics  which  follow,  certain  ones  are  appropriate  to  the  vill 
and  certain  ones  can  more  properly  be  applied  to  a  modern  country 
town.  Characterize  the  vill  as  compared  with  the  modern  country 
town  by  making  parallel  lists  under  the  headings  "Medieval  Vill" 
and  "Modern  Town."  Put  the  antithetical  expressions  opposite  each 
other.  Be  ready  to  explain  fully  why  you  put  each  in  the  place  you 
do.  Agricultural,  dependent,  competitive,  customary,  local,  isolated, 
manufacturing,  self-sustaining,  producing  for  gain,  making  payments 
in  kind,  producing  for  subsistence,  using  money  economy. 

20.  We  say  that  institutions  come  into  existence  to  perform  certain 
functions.  Looking  at  the  matter  in  a  large  way,  is  not  the  vill  such 
an  institution?     What  functions  did  it  perform? 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY     39 

21.  Looking  at  it  from  the  same  point  of  view,  what  could  cause  the 
vill  economy  to  disappear? 

22.  Consider,  but  do  not  answer  at  this  time,  the  following :  How 
did  we  come  to  have  our  institutions  of  (a)  private  property ;  (b)  special- 
ization ;  (c)  competition ;  (d)  wage  class ;  (e)  landlords ;  (/)  money 
economy;  (g)  communities  that  are  dependent  upon  one  another; 
(h)  large  cities? 

23.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Indxistrial  Society:  pp.  48-50,  and  Selections 
12,  18-25. 
Cheyney,  Industrial  and  Social  History  of  England:  Chap.  2. 


STUDY  IV 

THE  FUNCTIONING  STRUCTURE  OF  MEDIEVAL 
INDUSTRIAL  SOCIETY 

B.   Medieval  Towns  and  Manufactures 

PURPOSES  OF  THIS  STUDY: 

1.  To  study  the  organization  of  the  town  under  simple  conditions. 

2.  To  get  a  view  of  our  manufacturing  methods  as  they  contrast  with 

simpler  methods. 

The  beginnings  of  towns.  —  Various  causes  gave  rise  to  the 
towns  of  medieval  England.  In  many  eases  they  were  simply 
villages  or  manors  which,  for  various  reasons,  had  grown 
populous.  Such  overgrown  villages  depended  largely  on  farm- 
ing the  land  lying  adjacent  to  the  town  and  it  was  not  un- 
common for  other  business  to  be  stopped  during  harvest  time. 
In  other  cases,  towns  grew  up  around  a  fortified  place  or  around 
a  monastery  where  trading  privileges  were  offered.  This  was 
particularly  likely  to  occur  if  there  was  a  break  in  transportation 
at  this  point.  Indeed  a  break  in  transportation  was  perhaps 
the  most  important  single  cause  of  the  rise  of  towns.  Even 
in  self-sufficing,  manorial  England  there  was  some  trade. 
Grain,  meat,  and  fish  would  be  needed  in  one  part  of  the  coun- 
try rather  than  in  another.  Arms  were  always  in  demand  as 
were  various  forms  of  foreign  goods.  Accordingly,  at  certain 
places  on  the  coast  where  goods  were  landed,  at  points  on 
rivers  where  the  water  became  too  shallow  for  boats,  at  places 
where  rivers  crossed  roads  so  that  it  would  be  desirable  to 
change  from  boats  to  wagons  or  cart  transportation,  people 
would  congregate  and  finally  locate  permanently.  Sometimes 
towns  which  had  already  started  owed  part  of  their  growth 

40 


STRUCTURE    OF  MEDIEVAL   INDUSTRIAL   SOCIETY     41 

to  the  fact  that  they  became  legal  centers  at  which  court  was 
held,  or  points  at  which  tax  collections  were  made. 

The  size  and  appearance  of  the  towns.  —  These  medieval 
towns  were  small  when  compared  with  our  modern  cities. 
Five  thousand  persons  would  have  been  considered  a  very  large 
town  and  many  of  these  m-ban  communities  must  have  had 
fewer  than  a  thousand  inhabitants.     As  for  their  appearance : 

"There  were  generally  a  few  streets  that  were  broad  and  straight, 
as  they  were  the  old  highways  on  wliich  the  town  had  grown  up.  The 
attempt  was  made  to  keep  these  clear  of  encroaching  houses  and  shops 
by  sending  a  horseman  through  them  once  a  year  with  a  spear  held 
horizontally,  and  by  forcing  the  removal  of  obstructions.  Most  of 
the  streets,  however,  had  grown  up  from  village  by-paths  and  were 
narrow  and  crooked.  They  were  rarely  paved,  and  as  they  served  as 
a  repository  for  all  Idnds  of  offal  and  garbage  we  can  understand  why 
the  towns-people  wore  wooden  overshoes  when  they  went  out,  and  even 
the  saints  in  the  pictures  were  painted  with  them  on.  The  houses 
were  of  wood  in  the  early  period,  and  there  were  no  chinmeys,  so  that 
fires  were  frequent  and  disastrous  until  they  forced  people  to  a  better 
mode  of  building.  Travelers  in  Europe  now  remark  upon  the  pictur- 
esque beauty  of  the  old  houses,  and  upon  the  merits  of  their  construc- 
tion, but  it  should  be  noted  that  most  of  these  reHcs  date  from  the  very 
end  of  the  Middle  Ages  and  that  they  were  the  select  few  of  their  time, 
and  give  no  indication  of  the  character  of  the  average  house.  Most 
of  the  people  Uved  in  narrow  quarters,  dark  and  drafty,  unsuited  for 
good  work  places  and  unwholesome  as  habitations.  Wares  were  ex- 
posed for  sale  either  in  the  open  market-places  which  are  so  common  in 
European  towns,  or  in  little  shops  hke  peddlers'  booths  at  the  front  of 
the  house.  The  municipal  government  spent  Uttle  or  nothing  for 
public  works  or  police  protection;  it  tried  to  make  the  inhabitants 
share  in  performing  all  absolutely  necessary  duties,  but  succeeded  so 
ill  that  all  the  towns  were  sinks  of  disease,  and  breach  of  the  peace 
was  a  constant  occurrence."  ' 

The  economic  activity  of  the  town.  —  For  our  purposes  the 
outstanding  significance  of  the  town  was  that  it  meant  a 
new  kind  of  cooperation  —  that  secured  by  exchanging  goods. 

'  Clive  Day,  Hiatory  of  Commerce,  pp.  4f)-46. 


42  OUR  ECONOMIC   ORGANIZATION 

Of  course  the  people  in  these  early  towns  still  depended  largely 
on  agriculture  —  still  used  in  their  agricultural  work  the  co- 
operation which  involves  all  working  together  at  the  same 
task.  But  in  addition  to  their  agricultural  activities  many 
persons  in  the  towns  were  traders  and  specialized  workmen, 
or  craftsmen,  who  sold  their  products  to  one  another  and  to 
outsiders.  Thus  they  cooperated.  But  it  was  a  cooperation 
different  from  that  on  the  manor  where  all  worked  at  the  same 
task.  It  was  the  cooperation  resulting  from  men  specializing  in 
different  tasks  and  exchanging  the  results  of  their  specialized  work. 
Merchant  gilds  controlled  trade.  —  In  the  earlier  days,  the 
townsmen  who  engaged  in  trade  and  manufacture  were  in 
most  towns  members  of  organizations  called  merchant  gilds, 
gilda  mercatoria.  The  trader  and  the  craftsmen  of  that  day 
were  not  sharply  differentiated. 

"  Every  master  craftsman  was  regarded  as  a  merchant,  for  he  bought 
his  raw  materials  and  sold  the  products  of  his  handiwork  in  his  shop 
or  at  his  stall,  just  as  some  coopers,  shoemakers,  bakers,  and  other 
tradesmen  still  do  at  the  present  day.  The  glover  bought  his  skins; 
the  baker  his  corn,  the  butcher  sold  hides  as  well  as  meat ;  the  weaver, 
fuller,  and  dyer  bought  wool  and  woad,  and  sold  cloth;  the  tanner 
bought  bark  and  hides,  and  sold  leather.  Craftsmen  were  not  only 
admitted  to  the  Gild  Merchant,  but  also,  in  all  probability  constituted 
the  majority  of  its  members."  ^ 

No  one  knows  positively  how  these  gilds  arose.  Different 
ones  may  have  had  different  origins.  Perhaps  in  their  be- 
ginnings they  were  largely  religious  fraternities;  certainly 
they  usually  performed  many  religious  functions.  Possibly 
they  were  originally  merely  private  voluntary  associations  of 
men  banded  together  for  protection  during  some  journey; 
certainly  their  later  rules  often  made  provision  for  their  mem- 
bers to  be  armed,  for  the  ransoming  of  a  gildsman  who  was 
taken  prisoner,  and  for  tarrying  with  a  member  who  might  be 
slow  in  disposing  of  his  wares  so  that  he  might  not  have  to 
travel  alone. 

>  Charles  Gross,  The  Gild  Merchant,  I,  pp.  107-120. 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY     43 

Whatever  their  origin,  they  had  become,  at  the  time  we  are 
studying  them,  strongly  organized  bodies  that  in  many  cases 
must  have  included  practically  all  of  the  free  men  of  certain 
towns.  Their  functions  had  a  wide  range.  Quite  generally 
they  had  control  of  the  manufacturing  and  selling  in  the  town. 
Indeed,  they  had  monopoly  control,  in  the  sense  that  no  one 
but  gildsmen  could  engage  in  such  enterprises  and  that  the 
guidance  of  these  enterprises  fell  almost  entirely  under  the 
regulations,  or  laws,  or  ordinances  of  the  gilds. 

These  regulations  were  planned  to  give  strength  to  the  gilds 
and  to  secure  to  their  members  the  greatest  advantages  of 
trade.  A  gild  might,  for  instance,  require  that  no  one  in  that 
city  except  gildsmen  could  buy  to  sell  again,  and  no  one  from 
outside  could  sell  there  at  all,  excepting  under  the  regulations 
laid  down  by  the  gilds.  Outsiders  were  called  foreigners  and 
were  looked  upon  with  suspicion.  If  foreigners  were  allowed 
to  trade  at  all,  it  was  under  strict  limitations,  and  after  the 
payment  of  tolls  and  taxes.  The  ordinances  of  the  Gild  Mer- 
chant of  Southampton  contained  these  statements : 

"And  no  one  in  the  city  of  Southampton  shall  buy  anjrthing  to  sell 
again  in  the  same  city,  unless  he  is  of  the  Gild  Merchant  or  of  the 
franchise  .  .  .  and  no  one  shall  buy  honey,  fat,  salt  herrings,  or  any 
kind  of  oil  or  millstones,  or  fresh  hides,  or  any  kind  of  fresh  skins,  un- 
less he  is  a  gildsman ;  nor  keep  a  tavern  for  wine  ;  nor  sell  cloth  at  re- 
tail, except  in  market  on  fair  days ;  nor  keep  grain  in  his  granary  be- 
yond five  quarters,  to  sell  at  retail,  if  he  is  not  a  gildsman ;  and  who- 
ever shall  do  this  and  be  convicted  shall  forfeit  all  to  the  kind.  .  .  . 
And  no  private  man  or  stranger  shall  bargain  for  or  buy  any  kind  of 
merchandise  coming  into  the  city  before  a  burgess  of  the  Gild  Merchant, 
so  long  as  the  gildsman  is  present  and  wishes  to  bargain  for  and  buy 
this  merchandise ;  and  if  anyone  does  so  and  is  convicted,  that  which 
he  buys  shall  be  forfeited  to  the  kind.  .  .  ."  * 

The  Gild  Merchant  not  only  regulated  trade  with  outsiders 
but  also  laid  down  the  rules  and  laws  for  trade  among  its  own 

'  University  of  Pennsylvania,  Department  of  History,  Reprints  from  the  Sources  of 
European  History,  Ist  Ser.,  Vol.  11,  No.  1,  pp.  12-17. 


44  OUR   ECONOMIC   ORGANIZATION 

members.  Said  the  ordinances :  "  No  one  of  the  gild  ought 
to  be  partner  or  joint  dealer  in  any  of  the  kinds  of  merchandise 
before  mentioned  with  any  one  who  is  not  of  the  gild,  by  any 
manner  of  coverture,  or  art,  or  contrivance,  or  collusion,  or 
in  any  other  manner."  ^  .  .  .  "  And  any  one  who  is  of  the 
Gild  Merchant  shall  share  in  all  merchandise  which  another 
gildsman  shall  buy  of  any  other  person,  whoever  he  is,  if  he 
comes  and  demands  part  and  is  there  where  the  merchandise 
is  bought,  and  also  if  he  gives  satisfaction  to  the  seller  and 
gives  security  for  his  part.  But  no  one  who  is  not  a  gildsman 
is  able  or  ought  to  share  with  a  gildsman  without  the  will  of 
the  gildsman."  ^ 

The  gild  also  looked  after  many  interests  of  the  consumer. 
Its  members  must  give  full  weight  and  good  measure,  must  see 
that  "  the  assize  of  bread  and  ale  be  well  kept  in  all  points 
according  to  the  price  of  corn,"  and  must  not  sell  goods  of  a 
quality  below  the  standard  set  by  the  gilds.  Then,  too,  the 
gild  set  its  face  strongly  against  forestalling,  engrossing,  and 
regrating.  In  other  words,  one  could  not  forestall  by  going 
out  and  buying  from  a  vendor  or  seller  who  was  bringing  goods 
to  town  before  others  had  an  opportunity  to  buy,  and  he  could 
not  engross  and  regrate  by  monopolizing  the  market  in  order 
to  secure  a  high  price. 

Besides  its  strictly  business  functions,  the  gild  was  interested 
in  the  religious,  civic,  and  social  life  of  the  town.  It  looked 
out  for  the  poor,  provided  for  the  fining  or  imprisonment  of 
its  members,  or  of  others  who  engaged  in  brawls  or  otherwise 
violated  what  we  should  to-day  regard  as  police  regulations.  It 
aided  its  members  who  had  been  overcome  by  poverty  or  had 
been  taken  prisoners  in  some  other  community.  Sick  benefits 
or  aid  to  members  who  were  ill  were  paid  out  of  its  common 
fund,  and  expenses  of  burial  were  provided  for  impecunious 
members  of  the  brotherhood.  In  some  places  the  Gild  Merchant 
was  probably  almost  the  same  thing  as  the  town  government. 

•  University  of  Pennsylvania,  Department  of  History,  Reprints  from  the  Sources  of 
European  History,  Ist  Ser.,  Vol.  II,  No.  1,  pp.  12-17. 


STRUCTURE   OF   MEDIEVAL   INDUSTRIAL  SOCIETY     45 

Craft  gilds  grew  up.  —  As  time  went  on  there  was  such  an 
expansion  of  trade  and  such  an  increase  in  the  number  of  crafts 
that  the  old  Gild  Merchant  was  not  able  to  care  for  the  situa- 
tion adequately.  Some  groups  of  craftsmen  found  that  they 
had  more  interests  among  themselves  than  with  all  the  other 
merchants  and  craftsmen  of  the  town.  Such  groups  tended 
to  form  smaller  gilds  of  their  own  which  became  known  as 
craft  gilds.  Craft  gilds,  made  up  of  the  members  of  single 
crafts,  in  some  cases  took  over  all  the  work  of  the  old  Gild 
Merchant  so  that  the  older  organization  disappeared.  In 
other  towns,  both  gilds  existed,  more  or  less  supplementing 
one  another.  As  new  forms  of  industry  arose,  more  and  more 
craft  gilds  appeared.  The  following  list  of  the  craft  gilds 
in  a  religious  play  in  York  in  1415  gives  us  some  idea  of  the 
extent  to  which  occupations  had  become  differentiated  by 
that  date.  This  is  not  a  complete  list  of  medieval  crafts- 
men, but  think  how  it  compared  with  the  7000  and  more 
occupations  listed  in  the  last  census  report  of  our  national 
government. 

" Woolen- weavers ;  Plasterers;  Armorers;  Parchment  Makers  and 
Bookbinders ;  Chandlers ;  Spurriers  ;  Lorimers ;  Barbers ;  Curriers ; 
Pouchmakers,  Bottlers  and  Capmakers;  Littisters;  Tilemakers, 
Millers,  Furriers,  Hayresters,  Bowlers ;  Winedrawers,  Drapers,  Linen- 
weavers;  Innkeepers;  Cardmakers;  Glovers;  Clothiers;  Goldsmiths; 
Goldbeaters  and  Moneyers;  Vintners;  Ironmongers;  Spinners  and 
Vcstmakers ;  Bowyers  and  Fletchers ;  Cooks  and  Watercarriers ;  Shear- 
men; Carpenters;  Brokers  and  Wool  Packers;  Mercers;  Fullers; 
Shipwrights ;  Spicers ;  Pewterers  and  Founders ;  (Formerly)  The  House 
of  St.  Leanord  —  (Now)  Masons;  Cutlers,  Bladesmiths;  Sheathers, 
Scalers,  Bucklermakers,  Homers;  Pin-makers,  Latten-makers  ;  Paint- 
ers ;  Scriveners,  Illuminators,  Pardoners ;  Dubbers ;  Tanners 
Coopers ;  Fishmongers ;  Mariners ;  Tilers ;  Marshals ;  Girdlers 
Nailers  and  Sawyers ;  Smiths ;  Plumbers  and  Patternmakers ;  Bakers 
Cordwainers ;  Tapestrymakers  and  Couchers ;  Butchers  and  Poultry 
Dealers;  Saddlers,  Glaziers  and  Joiners;  Tailors;   Potters.^ 

.   '■  •  Adapted  from   the   University  of   Pennsylvania,    Department    of    History,   Reprints 
from  the  Sources  of  European  History,  Ist  Ser.,  Vol.  II,  No.  1,  pp.  29-32. 


46  OUR  ECONOMIC   ORGANIZATION 

Under  the  handicraft  system,  as  it  was  called,  the  master 
craftsman  sometimes  worked  up  materials  which  were  brought 
to  him  by  his  customer  for  that  purpose.  Sometimes  the 
craftsman  raised  his  raw  materials  on  land  he  held,  or  he  bought 
them  from  some  other  producer  and  then  manufactured 
("  manufacture  "  originally  meant  "  making  by  hand  ")  them 


From  an  old  print 
Medieval  Craftsmen 

The  art  of  hatmaking  in  the  middle  ages-     Notice  the  absence  of  modern 
machine  methods. 

in  his  own  house  with  the  aid  of  very  simple  tools  which  he 
himself  owned.  He  disposed  of  his  finished  product  either 
by  "  making  it  to  order  "  for  a  customer  who  had  ordered  it 
in  advance  of  manufacture,  or  by  selling  it  to  some  customer 
who  came  to  his  little  shop  to  purchase  it,  or  by  taking  it  to 
the  town  market.  His  relations  to  the  customer  were  thus 
very  direct  and  personal ;  he  had  a  very  real  responsibility  for 


STRUCTURE   OF  MEDIEVAL   INDUSTRIAL   SOCIETY     47 

the  quality  of  his  goods.  His  operations  were  on  a  very  small 
scale.  He  might  do  all  the  work  alone,  though  he  was  generally 
aided  by  members  of  his  family,  and  sometimes  by  an  appren- 
tice or  two,  or  even  by  a  journeyman.  Obviously  his  position 
was  very  different  from  that  of  the  modern  wage  earner  who 
does  not  own  his  raw  materials,  nor  the  machine  at  which  he 
works,  nor  the  finished  product,  and  who  goes  to  a  great  fac- 
tory to  perform  his  work  at  stated  hours  and  under  definitely 
fixed  conditions.  If  a  choice  must  be  made,  he  was  more  like 
the  modern  factory  owner,  but  the  scale  of  operations  and 
the  social  environment  were  so  different  as  to  make  such  a 
comparison  of  little  value.  He  resembled  much  more  the 
custom  tailor,  dressmaker,  small  bakeshop  owner,  or  cobbler 
of  to-day. 

Although  it  appears  that  all  or  nearly  all  the  men  of  a  given 
trade  belonged  to  the  craft  gild  of  a  town,  still  not  every  one 
could  be  a  gild  member,  or  as  they  would  say  "be  of  the 
trade."  There  were  certain  requirements  which  had  to  be 
met.  The  eldest  son  of  a  gildsman  usually  inherited  the  right 
of  gildsmanship,  but  others  had  to  pay  initiation  fees  or  serve 
an  apprenticeship.  Since  one  could  not  ordinarily  engage  in 
a  given  business  unless  he  were  a  member  of  the  appropriate 
gild,  the  gilds  have  been  called  monopolies.  In  their  earlier 
days,  however,  they  were  not  necessarily  harmful  monopolies. 
Their  admission  requirements  were  reasonable.  Later  they 
raised  their  requirements,  making  it  difficult  for  others  to 
become  members.  They  did  this  so  that  a  relatively  small 
number  of  craftsmen  might  have  a  monopoly  of  a  given  trade 
and  thus  make  large  gains. 

Since  the  craft  gild  in  a  sense  took  the  place  of  the  older 
Gild  Merchant,  it  is  but  natural  that  its  regulations  should  be 
similar  to  those  of  the  Gild  Merchant.  But  since  the  crafts- 
men were  more  specialized  than  the  members  of  the  Gild  Mer- 
chant and  since  some  other  conditions  were  also  different,  the 
regulations  were  somewhat  different.  There  were  ordinances 
prescribing  in  detail  the  rules  governing  each  trade.     They 


48  OUR   ECONOMIC   ORGANTZATTON 

specified  very  definitely  the  proper  quality  of  the  work  and 
frequently  set  forth  the  sizes,  prices,  and  weights  of  various 
articles.  Then,  too,  matters  connected  with  conditions  of 
employment,  hours  of  labor,  methods  of  trading,  and  the 
times  at  which  goods  could  be  displayed,  were  stipulated. 
Night  work  might  be  forbidden,  partly  because  the  workmen 
could  not  do  their  tasks  properly  with  the  poor  light,  and 
partly  because  it  was  difficult  for  the  wardens  of  the  gild  to 
inspect  the  work  properly. 

We  may  summarize  the  work  of  the  craft  gilds  by  saying 
that  they  were  agencies  which  took  care  of : 

1.  Manufacturing. 

2.  Selling. 

3.  Protecting  the  consumer  against  fraud. 

4.  Regulating  the  hours,  conditions,  and  standards  of  work. 

5.  Educating  for  business. 

As  was  true  of  the  older  Gild  Merchant,  the  craft  gilds  also 
performed  functions  outside  of  the  business  realm.  They 
looked  after  many  of  the  social  and  religious  interests  of  their 
members  in  much  the  same  way  as  did  their  predecessor. 

How  the  gilds  educated  for  business.  —  Where  the  gilds 
were  in  control  of  business,  the  members  would  naturally  be 
anxious  that  persons  who  were  admitted  should  be  of  such 
character  and  habits  that  they  would  aid  in  solving  these 
difficult  questions  of  the  right  relationship  to  the  government, 
the  market,  and  the  competition  within  the  gild  itself.  Of 
course,  it  would  be  necessary  also  that  these  new  members 
should  be  skilled  in  the  hand  technique  of  the  craft.  To  meet 
this  need  of  the  situation,  the  gilds  developed  an  interesting 
and  thoroughgoing  system  of  business  education,  known  as 
apprenticeship.  To  become  a  master  craftsman  two  pre- 
liminary steps  were  likely  to  be  necessary :  first,  a  period  of 
apprenticeship,  and  second,  a  period  as  a  journeyman. 

In  attempting  to  understand  the  apprenticeship  system  we 
must  keep  in  mind  the  character  of  the  industry  of  the  day. 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY      49 

It  was  very  small-scale  industry  so  that  the  master  craftsman 
could  readily  give  personal  attention  to  the  instruction  of  the 
apprentice.  It  was  an  industry  of  very  simple  processes  so 
that  a  master  of  only  ordinary  intelligence  could  give  good 
instruction  in  the  technical  processes  involved.  It  was  an 
industry  serving  a  narrow  market  and  placed  in  the  midst  of 
a  simple  society,  so  that  the  social  relations  involved  could  be 
readily  understood  and  readily  explained  to  another.  In  such 
an  industry,  the  apprenticeship  system  operated.  The  appren- 
ticeship, which  was  usually  based  on  an  agreement  between 
the  apprentice  and  the  master,  varied  in  length,  but  usually 
lasted  about  seven  years.  During  this  time  the  apprentice, 
who  began  at  the  age  of  twelve  to  fourteen,  became  in  effect 
a  member  of  the  master's  family.  He  agreed  to  aid  the  master 
in  every  possible  way.  The  master,  on  the  other  hand,  agreed 
to  instruct  him  in  his  craft.  The  master  also  regulated,  com- 
monly according  to  the  rules  of  the  gild,  the  dress,  the  recrea- 
tion, the  habits  of  living ;  in  brief,  the  social  and  civic  training 
of  the  apprentice. 

An  Indenture  of  Apprenticeship,  1459  ^ 

"  This  indenture  made  between  John  Gibbs  of  Penzance,  in  the 
county  of  Cornwall,  of  the  one  part,  and  John  Goffe,  Spaniard,  of 
the  other  part,  witnesses  that  the  aforesaid  John  Goffe  has  put 
himself  to  the  aforesaid  John  Gibbs  to  learn  the  craft  of  fishing, 
and  to  stay  ^^dth  him  as  apprentice  and  to  serve  from  the  feast  of 
Philip  and  James  next  to  come  after  the  date  of  these  presents 
until  the  end  of  eight  years  then  next  ensuing  and  fully  complete ; 
throughout  which  term  the  aforesaid  John  Goffe  shall  well  and 
faithfully  serve  the  aforesaid  John  Gibbs  and  Agnes  his  wife  as 
his  masters  and  lords,  shall  keep  their  secrets,  shall  everywhere 
willingly  do  their  lawful  and  honourable  commands,  shall  do  his 
masters  no  injury  nor  see  injury  done  to  them  by  others,  but  pre- 
vent the  same  as  far  as  he  can,  shall  not  waste  his  master's  goods 
nor  lend  them  to  any  man  without  his  special  command.    And  the 

•  Taken  from  A.  E.  Bland,  P.  A.  Brown,  and  R.  H.  Tawney,  English  Economic  History: 
Select  Documents,  p.  147,  G.  Bell  &  Sons,  Ltd.,  1914. 


50  OUR   ECONOMIC   ORGANIZATION 

aforesaid  John  Gibbs  and  Agnes  his  wife  shall  teach,  train,  and 
inform  or  cause  the  aforesaid  John  Goffe,  their  apprentice,  to  be 
informed  in  the  craft  of  fishing  in  the  best  way  they  know,  chastis- 
ing him  duly  and  finding  for  the  same  John,  their  apprentice,  food; 
clothing,  Unen  and  woolen,  and  shoes,  sufficiently,  as  befits  such 
an  apprentice  to  be  found,  during  the  term  aforesaid.  And  at 
the  end  of  the  term  aforesaid  John  Goffe  shall  have  of  the  afore- 
said John  Gibbs  and  AgneS  his  wife  20s.  sterUng  without  any 
fraud.  In  witness  whereof  the  parties  aforesaid  have  inter- 
changeably set  their  seals  to  the  parts  of  this  indenture." 

At  the  end  of  his  training  as  an  apprentice,  the  candi- 
date for  craftsmanship  might  be  subjected  to  an  examination 
and  even  required  to  produce  a  "  masterpiece  "  under  the  sur- 
veillance of  the  gild's  officers. 

Such  a  training  gave  the  apprentice  a  mastery  of  the  technical 
aspects  of  the  business,  but  it  did  more.  It  did  much  to  fit  him 
to  be  a  manager  of  the  business  and  a  citizen  of  the  town.  He 
lived  in  the  family  of  the  master,  worked  at  every  process  of 
the  trade,  met  the  customers  of  the  shop,  heard  the  worries  and 
problems  of  the  master  craftsman,  and  became  familiar  with 
the  questions  which  he  must  meet  in  the  management  of  his 
own  business.  Furthermore  he  came  to  understand  the  re- 
lationship of  his  own  business  to  the  other  crafts  in  the  town 
and  to  the  laws,  policies,  and  customs  of  the  country.  The 
apprenticeship  system  furnished  accordingly  a  more  or  less 
automatic  means  of  rising  to  the  management  of  a  business 
and  to  a  responsible  position  in  the  community.  It  could 
hardly  fail  to  give  the  apprentice  hopefulness  of  outlook  con- 
cerning his  life  operations. 

The  significance  of  the  medieval  town.  —  The  self-sufficing 
medieval  manor  constituted,  it  is  true,  much  the  greater  part 
of  the  economic  life  of  the  time.  None  the  less  the  town 
had  great  importance  —  an  importance,  indeed,  out  of  all 
proportion  to  the  part  it  played  in  medieval  economic  life. 
As  we  have  seen,  it  was  the  seat  of  commerce  and  manufac- 
ture —  of  cooperation  through  exchange  of  goods.     This  meant, 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY     51 

for  the  nation  as  a  whole,  an  increased  abihty  to  gratify 
wants. 

The  coming  in  of  the  trader  and  craftsmen  meant  the  develop- 
ment of  a  new  social  class.  They  were  neither  peasant  nor 
gentry ;  neither  rulers  nor  ruled.  They  came  to  be  known  as 
the  "  middle  class."  As  time  went  on  their  ability  and  wealth 
raised  them  to  a  position  of  political  and  social  prominence. 
But  that  is  another  story. 

The  town  contributed  much  toward  breaking  down  the  local 
independence  and  self-sufficiency  of  manorial  life.  In  part,  it 
did  this  by  furnishing  a  market  from  which  goods  could  be 
secured  and  to  which  goods  could  be  sold.  In  part,  it  did  it 
by  political  rather  than  economic  methods.  Since  the  towns 
characteristically  obtained  a  charter  from  the  king  defining 
their  rights  and  powers  and  putting  them  on  a  basis  which  made 
nearly  all  their  inhabitants  free  men,  and  since  the  manorial  serf 
who  could  escape  and  live  in  a  town  for  a  year  and  a  day  became 
a  free  man,  the  towns  have  appropriately  been  called  "  islands 
of  freedom  in  a  sea  of  serfdom."  Their  function  as  a  haven 
of  refuge  for  the  escaping  serf  did  much  to  weaken  the  stability 
of  manorial  economy. 

Its  work  has  been  summed  up  by  one  thoughtful  writer  thus  : 
"  Out  of  town  life  with  its  trade,  its  craft,  its  middle  class,  and 
its  powers  of  united  action  came  three  kinds  of  gains :  wealth 
and  comfort;  knowledge  and  skill;  liberty,  and  ideals  of  honesty 
and  of  the  dignity  of  labor."  ^ 

Some  Comparisons  between  Manufacture  in  the  Medieval 
Town  and  American  Manufacture 

Under  the  gild  system  Under  American  conditions 

Manufacture  controlled  by  local      Condition  of  comparatively  free 
monopolistic  organizations.  competition. 

Small-scale  industry ;  small  shops,      Large-scale  production, 
few  people  in  each;    small  in- 
vestment. 

'  Tufts,  James  H.,  The  Real  Business  of  Living,  p.  89. 


52 


OUR  ECONOMIC   ORGANIZATION 


Some  Comparisons  between  Manufacture  in  the  Medieval 
Town  and  American  Manufacture  —  Continued 


Under  the  gild  system 
Mostly     tool     industry;      small 

amount  of  machinery. 
Cai'ried  on  in  small  shops;    gen- 
erally in  the  house, 
(^loods  produced  for  a  small  mar- 
ket ;   identifiable  production. 

Comparatively  small  number  of 
wage  earners  in  manufacture. 

Processes  of  manufacturing  few 
and  simple. 

Rules  for  conducting  business  laid 
down  largely  by  gild. 

Relationships  personal.  Manu- 
facturer in  close  relationship 
with  consumer,  fellow  manufac- 
turers, and  employees. 

Few  or  no  middlemen  between 
manufacturer  and  consumer. 

Much  manufacturing  for  custom ; 
"made  to  order." 


Under  American  conditions 
Machine    industry;     large    fixed 

capital. 
A  factory  system. 

Goods  produced  for  a  very  wide 
market ;  anonymous  produc- 
tion. 

Large  num])cr  of  wage  earners. 

Processes  of  manufacturing  many 
and  complex. 

Regulation  of  business  more 
largely  by  competition  and 
national,  state,  and  city  law. 

Relations  impersonal ;  manufac- 
turer seldom  knows  who  con- 
sumer will  be;  Imows  little  of 
his  many  employees. 

Frequently  many  middlemen  be- 
tween manufacturer  and  con- 
sumer. 

Manufacturing  for  stock;  cus- 
tomer not  yet  known. 


Each  side  of  the  above  comparison  represents  certain  char- 
acteristics of  the  two  forms  of  organization  in  manufacturing. 
Work  through  the  comparisons,  making  certain  you  understand 
the  significance  of  each  expression  used. 


PROBLEMS 


1.  During  the  medieval  period  the  number  of  people  in  manu- 
facturing was  small  compared  to  the  number  in  agriculture.  Why, 
then,  is  it  worth  our  while  to  spend  any  time  upon  the  study  of 
manufacturing  ? 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY      53 

2.  What  were  some  of  the  causes  giving  rise  to  the  towns?  Have 
we  any  towns  to-day  where  the  inhabitants  depend  at  least  partly  on 
agriculture?     Arc  there  any  in  your  locality? 

3.  Explain  the  so-called  "law  of  location,"  that  a  city  is  likely  to 
grow  at  a  break  in  transportation.  Is  your  own  town  or  city  an 
example  of  the  "law"?  See  if  the  law  applies  to  other  towns  in  your 
locality. 

4.  The  medieval  towns  obtained  charters  from  the  king.  Look 
under  "cities"  in  any  textbook  of  civics,  and  see  where  cities  in  our 
country  get  their  authority. 

5.  How  did  the  towns  in  medieval  England  compare  in  size  with 
American  or  English  cities  now?  Can  you  give  any  reasons  for 
the  difference?  (Consult  the  U.  S.  Census,  volumes  on  popu- 
lation.) 

6.  Does  a  town  or  city  of  to-day  ever  owe  part  of  its  growiih  to 
becoming  a  seat  of  governmental  activities?  What  was  the  origin  of 
Washington,  D.  C.  ? 

7.  What  do  such  names  as  Ox-ford  and  Cam-bridge  suggest  ?  Re- 
membering that  "castra"  is  the  Latin  word  for  camp  and  that  "burg" 
meant  a  fortified  place,  what  do  Chester,  Manchester,  Leicester,  and 
Edinburgh  suggest? 

8.  What  does  it  mean  to  say  that  the  gildsman  was  "workman, 
capitahst-owner,  and  laborer ' '  in  one  ? 

9.  What  are  some  of  the  ways  in  which  business  relations  at  the 
time  of  the  gild  were  personal?  How  are  they  now  impersonal  as 
contrasted  with  this? 

10.  Are  Uneeda  Biscuits  anonymously  (consult  a  dictionary  if  neces- 
sary) produced?  Are  Hart,  Schaffner,  and  Marx  clothes?  Cadillac 
automobiles?     Winchester  rifles? 

1 1 .  The  gro\vt  h  of  towns  meant  the  grou'th  of  a  "  non-servile ' '  middle 
class.  What  were  the  servile  classes  on  the  manor?  What  was  this 
new  middle  class? 

12.  Try  to  make  a  classification  of  the  problems  that  might  con- 
front a  manager  of  a  modern  manufacturing  business;  for  example, 
problems  of  finance,  problems  of  market,  problems  of  personnel,  prob- 
lems of  risk-bearing,  etc.  Did  these  same  problems  face  the  master 
craftsman  ? 


54  OUR   ECONOMIC   ORGANIZATION 

13.  What  devices  have  we  to-day  for  securing  full  weight  and  good 
measure  for  the  consumer?  For  securing  good  quality?  Do  we  rely 
in  part  on  "competition"?     Explain. 

14.  Have  we  any  devices  to-day  for  preventing  what  the  medieval 
merchant  called  forestalling,  engrossing,  and  regrating? 

15.  "The  simple  Gild  Merchant  passed  off  the  stage  when  conditions 
became  too  complex  for  it."  What  institutions  took  over  the  tasks  of 
the  Gild  Merchant? 

16.  In  what  ways  did  the  smallness  of  the  market  tend  to  keep  the 
craft  gildsman  playing  fairly  with  the  consumer?  Can  we  rely  on 
this  force  to-day? 

17.  In  how  many  cases  can  you  identify  the  maker  of  the  shoes, 
clothing,  and  other  articles  you  are  using  ? 

18.  Make  a  list  of  the  functions  or  tasks  of  the  craft  gild.  Put 
down  opposite  these  a  list  of  the  methods  or  devices  that  we  use  to-day 
to  perform  these  functions. 

19.  What  things  can  you  name  which  were  formerly  in  charge  of 
the  gilds  and  are  now  functions  of  government?  Do  you  see  what  is 
meant  in  saying  that  government  tends  to  take  charge  of  matters  which 
have  been  experimented  upon  and  standardized  by  individuals  or  pri- 
vate associations  ? 

20.  Can  you  see  any  advantages  that  came  to  the  consumers  at  the 
time  of  the  craft  gilds  from  giving  a  monopoly  of  certain  kinds  of 
trade  to  the  craft  ? 

21.  "The  gilds  were  monopolies."  Were  they  narrowly  closed 
monopolies  or  could  any  worthy  person  be  a  member?  What  differ- 
ence does  tlus  make  with  respect  to  your  judgment  concerning  the  social 
usefulness  of  the  organization? 

22.  Explain  how  the  gilds  educated  for  business.  Can  you  see  that 
it  makes  any  difference  to  society  at  large  whether  or  not  we  have 
persons  well  trained  for  business? 

23.  Have  we  to-day  any  automatic  provision  for  the  rise  of  people 
to  managerial  positions?    How  do  we  get  our  managers  to-day? 

24.  Do  we  require  examinations  for  people  to  enter  certain  voca- 
tions?    If  so,  who  conducts  such  examinations?     Why  have  them? 

25.  What  agencies  have  taken  over  the  work  formerly  done  by  the 
apprenticeship  system  in  training  for  citizenship? 


STRUCTURE   OF   MEDIEVAL   INDUSTRIAL   SOCIETY     55 

26.  "The  gilds  were  very  important  agencies  of  social  control." 
List  the  services  they  rendered  in  this  respect. 

27.  It  has  sometimes  been  said  that  the  craft  gild  was  like  our 
modern  trade  union.  Was  the  gild  made  up  of  people  who  worked  for 
others  for  hire?  Is  the  modern  union  a  part  of  city  government? 
Was  the  gild  more  like  a  modern  union  or  Uke  a  modern  merchants' 
or  employers'  association? 

28.  Had  specialization  been  carried  as  far  in  the  medieval  towTi  as 
in  the  modem  town? 

29.  Explain  how  it  can  be  said  that  we  owe  largely  to  the  influence 
of  manorial  life  our  ideals  of  courage,  loyalty,  protection  for  the  weak, 
chivalry  toward  women,  courtesy  and  consideration  of  others ;  and  to 
the  influence  of  the  towns  and  the  middle  class  we  owe  largely  our 
ideals  of  liberty,  honesty,  fairness,  and  the  dignity  of  labor. 

30.  In  the  town,  business  relations  were  based  on  contract  rather 
than  on  custom,  and  money  payments  rather  than  payments  in  kind 
made  their  appearance.     Explain. 

31.  Can  you  name  any  industries  of  to-day  which  survive  in  much 
the  same  form  in  which  they  existed  during  the  medieval  period? 
What  about  the  local  cobblers  ? 

32.  Can  you  show  any  relation  between  the  growth  of  to^ns  and 
the  use  of  money,  competition  in  business,  producing  for  profit,  specu- 
lative market,  a  wage  system,  agriculture  for  sale  or  commercial  agri- 
culture, specialization  of  labor? 

33.  In  the  comparison  made  in  the  text  between  manufacture  in 
the  medieval  town  and  American  manufacture,  name  some  features 
that  have  come  in  as  new  features  since  the  day  of  the  handicraft 
system.     Name  some  that  have  disappeared. 

34.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  48-52,  and  Selections 
26-40,  59,  60. 

Cheyney,  Industrial  and  Social  History  of  England:  Ch.  III. 


STUDY   V 

THE  FUNCTIONING  STRUCTURE  OF  MEDIEVAL 
INDUSTRIAL  SOCIETY 

C.   The  Beginning  of  Cooperation  through  Exchange 

PURPOSES  OF  THIS  STUDY: 

\.   To   observe   the   difficulties   connected   with   the   development   of 
medieval  trade  and  commerce. 

2.  To  see  how  commercial  institutions  and  organizations  were  adapted 

to  the  needs  of  the  case. 

3.  To  compare  medieval  commercial  organization  with  that  of  our  day. 

Some  advantages  of  trade  and  commerce.  —  Man  has  found 
that  commerce  is  a  great  aid  in  the  process  of  active  adaptation. 
It  assists  greatly  in  gratifying  wants.  To  begin  with,  it 
enables  us  to  secure  goods  which  would  not  otherwise  be  avail- 
able, for  not  all  the  things  we  desire  can  be  produced  in  our 
own  community.  Then,  too,  by  making  it  possible  for  persons 
and  even  communities  to  specialize  in  the  work  for  which  they 
are  best  fitted,  we  get  a  larger  quantity  and  also  a  better  quality 
of  goods.  Furthermore,  contact  with  others  through  trade  and 
commerce  enables  us  to  learn  of  new  methods  and  processes, 
quickens  our  imagination,  and  makes  us  more  productive. 

This  was  all  as  true  of  medieval  England  as  it  is  to-day. 
Historians  tell  us  that  although  a  favorable  season  might  result 
in  almost  a  glut  of  foodstuffs,  times  of  hunger  were  not  un- 
common on  the  medieval  manor  when  the  seasons  were  un- 
favorable. These  famines  were  likely  to  be  followed  by  sickness 
and  pestilence  and  the  people,  weakened  by  lack  of  food,  would 
die  in  great  numbers.  In  other  parts  of  the  world,  bettor 
methods  of  farming  were  being  practiced,  but  the  manorial  ten- 

5tj 


STRUCTURE    OP   MEDIEVAL   INDUSTRIAL   SOCIETY     57 

ants  were  unaware  of  them.  A  development  of  trade  and 
commerce  would  have  been  so  beneficial  in  preventing  local 
famines,  giving  variety  of  food,  improving  methods  of  produc- 
tion, and  relieving  the  provincial  ignorance  of  the  people  that 
we  might  be  forgiven  if  we  marveled  at  the  very  slight 
development  that  had  occurred  in  commerce. 

Why  medieval  trade  was  meager.  —  When,  however,  we 
observe  the  difficulties  which  surrounded  the  development 
of  medieval  trade,  our  surprise  is  not  at  its  meagerness  but  at 
its  extent. 

As  we  have  seen,  the  organization  of  society  in  medieval 
England  was  mainly  on  the  basis  of  self-sufficing,  independent 
unfits  and  these  units  were  in  the  powerful  grip  of  custom. 
When  people  live  in  isolated  communities  without  seeing  or 
hearing  of  others  and  when  their  whole  habit  of  life  consists 
in  following  customs  which  have  come  down  from  time  im- 
memorial, it  is  not  an  easy  thing  to  develop  new  methods  of 
gratifying  wants.  It  is  easy  for  us  of  the  twentieth  century  to 
look  back  and  see  how  they  would  have  gained  through  trade. 
It  was  almost  impossible  that  they  should  have  realized  it. 

Quite  aside  from  the  restricted  mental  outlook  of  the  people 
of  medieval  times,  there  was  a  very  serious  handicap  to  ex- 
change in  the  lack  of  good  roads.  There  were  a  few  good  roads 
dating  from  the  time  of  the  Roman  occupation  of  England,  but 
for  the  most  part  they  were  unspeakablj^  bad.  Four,  six,  and 
even  eight  of  the  small  horses  of  that  day  were  often  necessary 
to  haul  a  loaded  cart  through  the  ruts  and  mire.  The  manorial 
lords  were  supposed  to  be  responsible  for  keeping  up  the  roads, 
but  their  responsibility  was  not  always  clear  and  even  when  it 
was,  they  neglected  their  duties.  Bridges  were  of  course 
needed  for  the  passage  of  rivers,  but  very  few  were  built,  and 
the  ferries  or  fords  which  had  to  be  relied  upon  for  the  passage 
of  rivers  were  none  too  safe.  We,  to-day,  have  difficulty  in 
understanding  a  system  which  relies  upon  the  voluntary  con- 
tributions of  churches  and  pious  persons  for  the  maintenance 
of  roads  and    bridges,  yet  such  was  tlie  practice  in  medieval 


58  OUR  ECONOMIC   ORGANIZATION 

England.  It  existed  because  the  state  was  neither  strong 
enough  nor  interested  enough  to  maintain  good  means  of  com- 
munication. 

The  methods  of  carriage  were  as  poor  and  unsatisfactory 
as  were  the  roads  used  in  trade.  We  must  not  think  in  terms 
of  cars  propelled  by  modern  power  systems.  Most  people 
had  to  rely  on  their  own  backs  or  on  baggage  horses.  Low 
two-wheeled  carts  were  sometimes  available,  but  carriages 
were  possessed  only  by  the  very  rich.  The  limited  capacity  of 
these  means  of  carriage,  combined  with  the  atrocious  condition 
of  the  roads,  hampered  trade  in  a  way  which  can  hardly  be  over- 
estimated. 

Danger  of  violence  and  robbery  were  so  great  as  to  make 
land  travel  at  best  a  precarious  undertaking.  All  merchants 
found  it  necessary  to  carry  arms  for  their  own  protection  or 
even  to  travel  in  groups  or  caravans  the  better  to  resist  attack. 
The  difficulty  was  augmented  by  the  fact  that  many  of  the 
merchants  themselves  were  not  wholly  averse  to  a  little  robbery 
"  on  the  side."  The  lords  of  the  manor  were  frequently  impli- 
cated in  the  robbery  of  merchants  and,  if  they  did  not  rob  out- 
right, the  tolls  levied  by  the  feudal  lords  who  controlled  roads 
and  bridges  were  almost  as  confiscatory  as  theft  itself. 

If  the  merchant  took  to  the  water  routes  in  an  effort  to  avoid 
the  difficulties  of  land  travel,  he  was  barely  better  off  than 
before.  The  cost  of  carriage  might  be  less  and,  of  course,  more 
goods  could  be  loaded  upon  a  single  boat  than  could  be  put  upon 
a  land  conveyance,  but  the  rivers  were  not  kept  in  a  fit  condi- 
tion for  travel.  Their  channels  were  frequently  obstructed ; 
they  shifted  constantly ;  methods  of  navigation  were  not  well 
developed ;  and  the  flow  of  water  at  various  seasons  was  none 
too  certain.  Here,  too,  the  tolls  and  taxes  levied  by  feudal 
authorities  were  frequent  and  although  it  was  easier  to  protect 
oneself  against  robbers,  safety  was  by  no  means  certain. 

Impediments  to  foreign  trade.  —  Even  more  serious  difficulties 
lay  in  the  way  of  large  trade  between  England  and  foreign 
countries.     Commercial  treaties  were  rare  in  those  days  and 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY      59 

in  any  event  the  central  government  did  not  assume  responsi- 
bility for  facilitating  trade  or  indeed  for  protecting  its  citizens 
who  engaged  in  trade  and  travel.  Prejudice  against  persons 
not  of  one's  own  immediate  group  ran  very  high  and  it  is  not 
far  from  the  truth  to  say  that  the  inhabitants  of  a  foreign 
country  would  ordinarily  be  regarded  as  enemies. 

Then,  too,  for  both  domestic  and  foreign  trade  there  did  not 
exist  the  market  organization  of  our  day.  A  producer  in  Eng- 
land had  few  facilities  for  finding  out  where  his  goods  might  be 
needed.  The  telegraph,  the  telephone,  mail  service,  and  trade 
publications  upon  which  we  now  so  largely  depend  were  all, 
of  course,  unknown.  If  a  merchant  started  with  a  load  of 
wares  for  sale,  either  at  home  or  abroad,  his  trip  would  be  an 
adventure  filled  with  risks  and  uncertainties  such  as  we  can 
hardly  appreciate.  Where  would  he  go ;  where  would  he  find 
the  best  places  to  sell  his  goods ;  where  would  he  find  the  best 
commodities  to  bring  on  a  return  trip ;  what  goods  would  be 
most  wanted ;  would  he  find  the  market  overcrowded  when  he 
arrived?  Because  of  the  lack  of  organized  markets,  all  these 
questions  threw  risks  and  uncertainty  into  the  activities  of  the 
medieval  merchant. 

The  finances  of  the  time  were  also  unorganized.  On  the 
continent  many  of  the  great  feudal  lords  issued  coins  of  their 
own.  These  coins  could  never  be  relied  upon  for  weight  or 
value.  Even  in  England  counterfeiting  was  not  uncommon, 
and  in  all  medieval  commerce  the  coins  of  one  locality  or 
country  were  looked  upon  with  justifiable  distrust  in  other 
places.  While  the  goldsmith,  who  would  weigh  and  test  coins, 
did  much  to  overcome  the  difficulties  of  a  poor  coinage  system, 
it  was  usual  to  make  payments  in  distant  places  by  actually 
sending  bullion  or  goods.  We,  of  course,  rely  upon  our  banking 
system  and  other  financial  institutions  to  help  us  in  the  easy 
transmission  of  money  and  credit.  The  lack  of  these  thoroughly 
organized  and  trustworthy  institutions  was  a  serious  handicap 
to  medieval  commerce. 

The  means  of  transportation  were  as  unsatisfactory  in  foreign 


60  OUR   ECONOMIC   ORGANIZATION 

trade  as  thej^  were  in  domestic  trade,  and  the  dangers  were  not 
less.  The  ships  of  the  time  were  very  small  and  unsafe  and  the 
knowledge  of  navigation  was  very  limited.  The  general  use 
of  the  compass  belongs  to  a  later  period  and  without  it  naviga- 
tion of  the  open  seas  was  limited,  slow,  and  timid.  One  hesi- 
tated to  go  far  out  of  sight  of  land.  The  sailors  of  the  time  were 
filled  with  superstitious  fears  concerning  the  dangers  of  unknown 
parts  of  the  world  and  especially  of  the  ocean.  Such  water 
routes  as  had  been  fairly  definitely  established  were  infested  with 
pirates  from  whom  there  was  no  protection,  excepting  such  as 
the  merchant  himself  could  furnish.  National  navies,  such  as 
to-day  keep  the  sea  clear  of  marauders,  were  then  unknown. 
The  difficulty  was  increased  by  the  fact  that  many  of  the  early 
foreign  merchants,  like  many  domestic  traders,  could  hardly 
be  distinguished  from  pirates,  since  they  engaged  in  piracy 
if  a  good  opportunity  arose. 

How  foreign  trade  was  organized.  —  The  importance  of 
medieval  England's  foreign  trade  lay  not  in  its  quantity  but 
in  its  contribution  to  the  development  of  cooperation  through 
exchange.  Throughout  the  medieval  period,  England  was 
largely  a  self-sufficing  country.  Its  exports  were  mainly  in 
such  raw  materials  as  wool,  leather,  tin,  and  lead.  Its  imports 
were  chiefly  luxuries,  used  by  the  rich  and  well-to-do,  and  the 
tar  used  to  cure  sheep  of  scab. 

Few  Englishmen  engaged  in  foreign  commerce  in  the  earlier 
days.  When  the  people  of  England  and  of  northern  Europe 
offered  a  possible  market  for  exchanging  goods  from  the  Orient, 
it  was  the  merchants  of  Italy  who  for  a  long  time  controlled  the 
trade.  The  spices,  the  silk  and  cotton,  the  fine  cloths,  the 
dyestuffs,  the  diamonds,  pearls,  and  other  jewels,  that  found 
their  way  northward  and  into  England  came  very  largely 
through  the  hands  of  Italian  merchants.  These  Italian  mer- 
chants had,  before  other  people  of  Europe  appreciated  the  value 
of  such  things,  built  up  a  considerable  system  of  commercial 
law,  business  organization,  bookkeeping,  and  banking,  and  it 
was  from  them  that  England  and  the  other  coimtries  of  Europe 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY      61 

learned  their  early  lessons  in  commercial  education.  The  goods 
which  the  Italian  merchants  sent  to  England  in  exchange  for 
her  raw  products  came  once  a  year  on  what  was  known  as  the 
"  Flanders  Fleet."  This  fleet  was  a  group  of  vessels  which  was 
sent  out  under  the  authority  of  the  Venetian  government. 
The  goods  carried  by  this  fleet  of  vessels  were  owned  by  private 
merchants,  each  of  whom  "adventured"  on  his  own  capital 
within  the  general  organization  carried  on  by  the  government. 
On  its  way  northward  the  fleet  divided,  sending  part  of  the  gal- 
leys to  Bruges,  or  some  continental  port,  while  the  other  part  car- 
ried its  cargo  to  England. 

The  trade  with  Germany  and  the  countries  of  the  north  was 
for  the  most  part  controlled  by  a  group  of  merchants  of  these 
northern  countries,  known  as  the  German  league  or  the  German 
Hanse.  At  first  the  term  "Hanseatic  League"  seems  to  have 
meant  this  group  of  merchants,  but  later  the  term  was  applied 
to  a  group  of  the  chiof  cities  that  were  represented  by  these 
merchants.  The  purpose  of  this  organization  or  association 
was  to  furnish  protection  to  its  members  against  feudal  lords, 
pirates,  and  highwaymen;  to  make  commercial  treaties  with 
other  cities,  and  to  secure  a  monopoly  of  as  large  a  part  of  the 
commerce  of  northern  Europe  as  possible.  The  merchants  of 
the  Hanseatic  League  carried  on  their  trade  with  English  mer- 
chants chiefly  through  London  and  a  great  establishment  which 
the  League  built  there  called  the  Steelyard. 

The  exports  of  raw  materials,  of  which  wool  was  much  the 
most  important,  was  also  largely  in  the  hands  of  a  monopolistic 
group  called  the  Merchants  of  the  Staple.  Partly  as  a  means 
of  easy  control  and  regulation  of  the  export  trade,  there  was  a 
requirement  that  these  raw  materials  should  pass  through  cer- 
tain towns  known  as  "  staple  towns  "  or  "  staples."  Some- 
times there  were  several  of  these  towns,  sometimes  only  one. 
This  definite  designation  of  a  few  centers  through  which  the 
trade  must  pass  made  it  easier  to  collect  the  export  dues,  to 
insure  good  quality  of  goods  by  inspection,  and  to  set  up  a 
special     court    for    handling     disputes.     The    merchants  or 


62  OUR  ECONOMIC   ORGANIZATION 

"  staplers  "  constituted  a  fellowship  or  organization  similar  to 
the  gild  fellowship.  Their  monopoly  control  was  partly  due 
to  their  having  bought  the  privilege  from  the  king,  who  always 
needed  money ;  partly  due  to  the  fact  that  it  facilitated  good 
handling  of  the  trade ;  partly  due  to  copying  the  example  of  the 
gilds. 

A  little  later,  a  group  of  Englishmen  called  Merchant  Adven- 
turers engaged  in  export  trade  of  finished  goods.  This  group 
was  also  a  monopolistic  fellowship,  membership  being  open 
to  any  merchant  who  would  pay  the  fees  and  be  bound  by 
its  regulations.  It  is  interesting  not  only  for  its  own  sake  but 
also  because  it  served  as  a  sort  of  model  for  the  great  trading 
companies  called  '*  regulated  companies,"  of  the  later  centuries. 
We  shall  have  more  to  say  later  concerning  the  way  these  com- 
panies carried  on  their  work. 

How  domestic  trade  was  organized.  —  Having  seen  some- 
thing of  how  goods  from  abroad  reached  England  and  of  how 
England's  exports  found  their  way  into  other  countries,  let  us 
see  how  trade  was  organized  within  England  itself.  The  persons 
who  transported  goods  and  had  them  for  sale  were  chiefly  mer- 
chants, peddlers,  and  chapmen.  The  places  at  which  goods 
were  sold  were  principally  fairs,  markets,  and  shops. 

The  fairs  were  great  centers  of  trade.  We  are  none  too  cer- 
tain of  their  origin.  Probably  they  arose,  in  part,  because  of 
the  desire  to  have  witnesses  present  at  a  trading  transaction 
as  a  safeguard  against  being  charged  with  trafficking  in  stolen 
goods.  In  part,  they  arose  from  a  desire  to  have  trade  flow  in 
definite  channels  so  that  tolls  and  taxes  could  be  more  readily 
levied.  Partly,  also,  they  sprang  from  religious  gatherings, 
which  were  always  a  fertile  field  for  the  operations  of  the  mer- 
chant and  which  protected  him  by  the  powerful  arm  of  the 
church  against  robbery  and  theft.  Whatever  may  have  been 
their  origin,  they  spread  fairly  rapidly  in  the  twelfth,  thirteenth, 
and  fourteenth  centuries.  There  was  real  need  of  their  services 
and  a  great  impetus  was  given  them  by  the  fact  that  typically 
they  had  freedom  of  trade  in  the  sense  that  they  lay  outside 


STRUCTURE    OF  MEDIEVAL   INDUSTRIAL  SOCIETY     63 

of  the  jurisdiction  of  the  gilds.  This  would  naturally  attract 
the  foreign  trader  and  in  those  days  "  foreigners  "  meant  any 
one  from  outside  the  local  community. 

The  fairs  were  held  at  quite  infrequent  intervals,  sometimes 
only  once  a  year.  It  was  to  these  great  fairs  that  the  foreign 
merchants  chiefly  wended  their  ways,  bringing  goods  to  be 
sold  and  also  making  purchases  of  goods  to  be  carried  abroad. 
Here  could  be  found,  at  least  during  the  later  middle  ages, 
"  merchants  from  Venice  and  Genoa  with  costly  spices  from 
the  East  and  silks  and  velvets  and  '  things  of  complacence,'  " 
the  Flemish  weaver  with  linen  cloth,  the  Spaniard  with 
iron,  the  Norwegian  with  tar,  the  Gascon  with  wine,  and  the 
Teuton  with  furs  and  amber.  At  the  fairs  also  were  gathered 
native  produce  —  wool,  the  source  of  England's  wealth  in  the 
middle  ages  ;  tin  from  Cornwall ;  salt  from  the  Worcestershire 
springs ;  lead  from  the  Derbyshire  mines ;  iron  from  the 
Sussex  forges ;  and  cloth  which  the  drapers  were  wont  to  pur- 
chase, "  at  home  and  abroad  about  Michaelmas  for  the  fairs 
ensuing."  "  Here  the  bailiff  purchased  his  farm  implements  and 
stores  of  salt  and  sheep-machines  and  fish  for  Lent,  the  noble 
his  armour  and  steed  and  falcons,  the  lady  her  robes  and 
dresses."  ^  To  these  fairs  came  also  the  merchants  and  the 
gildsmen  from  neighboring  towns  seeking  a  place  at  which 
they  could  purchase  wares  for  resale  or  an  opportunity  to  dis- 
pose of  goods  of  their  own  locality.  Regardless  of  whether  the 
fair  was  under  the  control  of  an  abbot  or  a  nobleman,  tolls  were 
collected  from  all  merchants  for  the  advantage  of  the  "  owner  " 
of  the  fair.  Fees  and  rents  were  charged  for  space  to  exhibit 
goods  and  good  order  was  preserved  by  the  person  under 
whose  auspices  the  fair  was  held. 

It  was  in  these  fairs  that  there  originated  in  England  the 
system  of  commercial  law,  or  law  of  business  dealings,  which 
in  a  large  measure  exists  to-day.  Merchants  from  abroad  and 
especially  the  Italian  merchants  had  much  to  do  with  the  prac- 
tices which  became  customary  and  enforceable  at  these  fairs. 

'  E.  Lipson,  The  Economic  History  of  England :    The  Middle  Ages,  p.  221. 


64  OUR   ECONOMIC   ORGANIZATION 

Traveling  as  they  did  from  fair  to  fair  they  put  the  same  system 
into  effect  and  thus  there  grew  up  throughout  England  a  system 
of  business  law  which  was  recognized  through  the  country  as  the 
binding  "  practice  of  merchants."  There  grew  up,  also,  courts 
that  very  rapidly  adjusted  disputes  between  merchants,  basing 
their  decisions  upon  the  laws  of  the  merchants.  At  these  fairs, 
also,  there  was  an  opportunity  for  the  beginnings  of  banking. 
The  practices  of  the  most  commercially  advanced  countries 
in  using  notes  and  drafts  became  familiar  to  all.  The  meeting 
of  many  people  from  many  places  developed  a  new  confidence 
in  strangers  which  made  more  easy  the  coming  of  such  commer- 
cial institutions  as  banks  and  credit. 

A  market  was  usually  established  in  a  town  by  a  grant 
from  the  king  to  some  favored  individual  or  to  the  town  as  a 
whole.  Such  a  town  was  commonly  called  a  "  market  town." 
These  market  towns  furnished  places  where  the  goods  pur- 
chased by  the  merchants  at  fairs  could  be  further  distributed, 
or  where  the  exchange  between  country  and  town,  or  between 
craftsmen  of  the  town,  could  readily  take  place.  Markets  were 
apt  to  be  held  weekly  or  semi-weekly  and  here,  as  at  the  fair, 
buyers  and  sellers  could  meet  and  exchange  in  conformity  with 
the  legal  requirements  of  the  time.  The  principal  benefit 
of  the  market  was  to  the  people  of  the  town  in  which  it  existed, 
whereas  a  fair,  also  authorized  by  a  royal  grant,  was  a  national 
or  even  an  international  institution. 

In  the  period  we  are  studying,  the  shop  was  a  relatively  un- 
important trading  place  except  in  such  a  large  city  as  London. 
They  were  not  shops  as  we  think  of  them  but  merely  stalls 
in  the  market  place  that  finally  developed  into  sheds ;  or  shelves 
attached  to  the  front  part  of  the  craftsman's  house ;  or  dingy 
cellars  under  the  house.  All  of  this  is,  of  course,  a  far  cry  from 
our  modern  retail  stores,  though  certain  parallels  may  be  found 
in  our  delicatessen  stores  and  other  small  shops  located  on  resi- 
dence streets. 

To  and  from  these  markets  and  fairs,  and  more  especially 
the  fairs,  traveled  the  merchant,  the  peddler,  and  the  chapman, 


STRUCTURE    OP^   MEDIEVAL   INDUSTRIAL   SOCIETY     65 

carrying  the  trade  of  England.  The  merchants  were  by  far 
the  most  important  because  of  the  amount  of  goods  they  carried. 
Peddlers  who  carried  nothing  that  they  could  not  carry  in  their 
packs  were  of  consequence  only  in  their  numbers  and  the  chap- 
men were  in  importance  about  midway  between  the  merchants 
and  the  peddlers. 

Some  characteristics  of  medieval  commerce.  —  Perhaps  the 
most  important  characteristic  of  medieval  commerce  was  its 
meagerness.  Compared  with  trade  such  as  we  know,  the  ex- 
change of  the  medieval  period  was  small  and  insignificant. 
The  Flanders  Fleet,  the  arrival  of  which  was  a  significant 
commercial  event,  meant  after  all  only  the  coming  of  a  compara- 
tively few  small  ships  once  a  year.  The  fairs,  brilliant  centers 
of  activity  and  business  though  they  were,  as  contrasted  with 
the  humdrum  monotony  of  most  medieval  existence,  transacted 
a  volume  of  business  that  is  very  small  indeed  when  compared 
with  that  which  takes  place  daily  in  any  of  our  larger  modern 
cities. 

The  merchants  of  early  medieval  England  were  not  such 
specialists  as  are  merchants  of  to-day.  The  Flanders  Fleet 
would  bring  to  England  all  the  variety  of  things  that  could  be 
furnished  by  Italy  or  the  Orient  and  even  the  traveling  mer- 
chants would  carry  quite  a  varied  stock  of  goods.  One  his- 
torian of  this  period  speaks  thus  of  the  goods  carried  by  a 
peddler  or  chapman : 

"A  host  of  small  useful  things  were  concealed  in  their  unfathomable 
boxes.  The  contents  of  them  are  pretty  well  shown  by  a  series  of 
illuminations  in  a  fourteenth-century  manuscript,  where  the  peddler 
is  represented  asleep  at  the  foot  of  a  tree,  while  monkeys  have  got 
hold  of  his  box  and  help  themselves  to  the  contents.  They  find  in  it 
vests,  caps,  gloves,  musical  instruments,  purses,  girdles,  hats,  cutlasses, 
pewter  pots,  and  a  number  of  other  articles."  ^ 

The  medieval  merchant  specialized  neither  in  the  goods  he 
handled  nor  in  the  functions  he  performed.  His  functions  in- 
volved much  more  than  the  buying  and  soiling  of  goods.     It 

'  From  J.  J.  Jusserand,  English  Wayfaring  Life  in  the  Middle  Ages,  p.  233. 


66  OUR   ECONOMIC   ORGANIZATION 

was  necessary  that  he  should  do  his  own  transporting  since 
there  were  no  special  carriers  upon  which  he  could  call  for  the 
duties  of  transportation.  It  was  necessary  that  he  should  ob- 
tain his  own  market  information.  Trade  journals,  govern- 
ment reports,  and  the  information  that  can  now  be  obtained  by 
telegraph  and  telephone  were  not  at  his  disposal.  He  had  to 
protect  his  wares  himself.  On  land,  he  found  it  necessary  to 
be  a  policeman  and  a  soldier.  If  he  traveled  by  sea,  such  naval 
forces  as  he  could  organize  were  his  only  protection  against 
pirates  or  competitors.  All  the  risks  of  trade  and  travel,  of 
loss  by  fire  or  storm,  he  carried  himself,  since  insurance  compa- 
nies were  not  in  existence  to  aid  him.  Losses  from  bad  credits 
could  not  be  avoided  by  insurance,  nor  could  they  be  prevented 
through  such  institutions  as  our  modern  credit  and  commercial 
agencies.  He  furthermore  performed  the  functions  of  adver- 
tising and  selling,  since  the  modern  advertising  agencies  and 
the  modern  specialized  selling  agent  were  not  available. 

In  keeping  with  the  foregoing  characteristics  of  medieval 
trade,  it  was  conducted  largely  by  monopolistic  associations. 
We  have  already  seen  the  monopoly  of  the  gilds  in  domestic 
trade,  although  we  must  remember  that  their  monopolistic 
control  did  not  extend  over  the  fairs  and  markets.  As  regards 
foreign  trade,  by  means  of  associations  risks  could  be  distributed, 
information  gathered  and  distributed  among  members  of  the 
group,  losses  made  less,  and  greater  protection  given  while 
the  merchants  were  on  the  way.  Then,  too,  the  king  could 
more  easily  tax  and  control  a  few  associations  than  he  could 
many  individuals.  Here  we  have  one  of  the  reasons  for  the 
monopolistic  character  of  the  staplers,  the  merchant  adven- 
turers, and  the  later  "  regulated  companies."  Another  reason 
lay  in  the  fact  that  merchants  were  unwilling  to  take  the  risk 
and  expense  of  opening  up  foreign  trade  unless  they  could  be 
safeguarded  in  it  after  it  had  developed. 

While  these  early  companies  furnished  the  basis  for  some  of 
the  features  of  the  modern  corporation,  such  as  management 
by  elected    officers,  regulations    or    by-laws  to    govern  these 


STRUCTURE   OF   MEDIEVAL   INDUSTRIAL   SOCIETY     67 

officers,  the  "  separateness  "  or  separate  entity  of  the  company 
and  (rarely)  a  common  stock  or  fund  of  capital,  they  must  not 
be  confused  with  our  modern  corporation.  It  was  the  task  of 
the  medieval  company  to  furnish  the  general  environment  for 
trading ;  such  as  information,  protection,  and  the  maintenance 
of  stations  or  "  factories  "  as  they  were  then  called.  Each 
merchant  "  adventured  "  on  his  own  capital  or  in  partnership 
with  some  other  merchant  and  made  his  own  profits  or  losses. 
His  dues  to  the  company  were  a  sort  of  fee  for  maintaining 
what  we  have  called  the  trading  environment.  A  full  compari- 
son can  best  be  made,  however,  after  we  have  studied  the  modern 
corporation. 

Social  control  of  medieval  commerce.  —  Trade  and  commerce, 
like  most  other  affairs  of  our  industrial  hfe,  are  carried  on  sub- 
ject to  social  control.     There  are  always  "  rules  of  the  game." 

We  have  already  seen  that  the  gild  was  a  very  important 
agency  of  control.  We  have  also  seen  the  growth  of  commercial 
law  in  connection  with  the  fair.  Another  powerful  agency  of 
control  was  the  church.  This  strong  organization  had  a  power- 
ful influence  over  the  medieval  mind.  The  church  was  a  state  in 
itself,  with  its  own  laws  and  courts,  and  it  particularly  concerned 
itself  in  the  business  field,  with  the  enforcement  of  two  doctrines. 
One  of  these  was  that  goods  should  be  sold  for  a  just  price  ;  the 
other,  that  the  taking  of  interest,  or  usury  as  it  was  called,  was 
sinful. 

In  medieval  England,  money  was  seldom  used  for  busi- 
ness purposes.  It  was  generally  borrowed  in  case  of  misfortune 
or  to  enable  some  one  to  go  on  a  crusade  or  other  religious  pil- 
grimage, or  to  help  build  a  monastery  or  cathedral.  The  tak- 
ing of  interest  under  such  circumstances  naturally  seemed  to 
the  church  objectionable.  Later  when  opportunities  for  using 
money  in  trade  and  industry  increased,  the  church  was  unfor- 
tunately slow  in  changing  its  attitude.  Its  opposition  to  interest 
somewhat  hampered  and  retarded  the  growth  of  business  enter- 
prises. Over  against  this  defect,  however,  we  must  remember 
that  the  church  influenced  the  development  of  fairs  and  markets 


68  OUR   ECONOMIC   ORGANIZATION 

in  connection  with  its  religious  festivals  and  that  it  assisted  in 
maintaining  the  peace  and  order  so  essential  to  the  development 
of  commerce. 

The  doctrine  of  the  just  price  was  widely  accepted  both  inside 
and  outside  of  the  church  and  widely  applied  to  both  commodi- 
ties and  services.  It  has  been  defined  as  "  the  common  esti- 
mation of  what  was  right  "  and  it  was  believed  that  this  could 
])e  deterlnined  in  advance  of  a  transaction.  This  Ijclief  strongl}'' 
influenced  all  trading  processes  and  was  indeed  crystallized  into 
municipal  regulations  and  national  laws  in  connection  with  the 
so-called  assizes  of  bread  and  ale  which  typically  provided  that 
the  price  of  these  commodities  should  have  a  certain  relation- 
ship to  the  price  of  grain. 

Of  course  government  played  an  important  part  in  control. 
We  already  know  that  it  was  not  always  easy  to  differentiate 
between  the  gilds  and  the  local  municipal  government.  The 
central  government  played  its  part  bj^  such  methods  as  the  issu- 
ance of  a  national  currency,  the  standardization  of  weights  and 
measures,  the  maintenance  of  trade  routes,  the  regulation  of 
foreign  trade,  the  determination  of  relations  between  English 
and  foreign  traders,  the  prohibition  of  usury,  and  the  enforce- 
ment of  the  payment  of  mercantile  del:)ts. 

Custom  did  not,  of  course,  control  trade  and  commerce  to 
the  extent  it  controlled  manorial  life.  Nevertheless,  its  indirect 
influence  was  yery  great  indeed.  The  formal  regulations  of 
the  gild,  of  the  town,  of  the  national  government,  and  of  the 
church  were  largely  statements  of  customary  practices. 

PROBLEMS 

1.  Why  do  we  buy  bananas  from  Central  Amorica?  Why  do 
people  in  Chicago  get  fruit  from  California  and  fish  from  the  Atlantic 
Coast? 

2.  Give  as  many  illu-strations  as  you  can  of  the  way  in  wliich  ]3eople 
of  medieval  ]*]ngland  could  have  bcnefilcd  l)y  exchange.  Make  a  list 
of  the  undesirable  conditions  of  medieval  life  which  could  have  been 
remedied  by  trade  and  commerce. 


STRUCTURE    OF   MEDIEVAL   INDUSTRIAL   SOCIETY      69 

3.  Does  trade  make  life  less  precarious?  Would  greater  trade  in 
medieval  England  have  been  likely  to  have  resulted  in  less  waste  in 
a  year  of  good  production  ? 

4.  Explain  what  is  meant  by  saying  that  medieval  England  was 
organized  so  that  people  might  exist  with  httle  commerce. 

5.  "The  manor  was  an  institution  well  adapted  to  an  age  of  little 
commerce."     Explain. 

6.  Make  a  list  of  the  transportation  facilities  which  aid  us  in  our 
commercial  relations.  Contrast  them  with  the  ones  that  existed  in 
medieval  times. 

7.  In  his  History  of  Commerce,  Day  tells  of  a  "glover  who  was 
traveling  to  market  (1499)  and  was  dro^vned  with  liis  horse  in  a  pit 
which  the  miller  had  dug  to  get  clay  from  the  road.  A  court  acquitted 
the  miller  on  the  ground  that  he  had  no  malicious  intent,  and  merely 
did  not  know  of  any  other  place  where  he  could  get  the  kind  of  clay  he 
wanted."  AVhat  would  a  modern  court  decide?  What  is  the  signifi- 
cance of  this  story  for  the  purposes  of  this  study? 

8.  A  navigable  river  flows  past  a  piece  of  land  wliich  you  own. 
Why  do  you  not  levy  a  tax  upon  the  commerce  which  passes  up  and 
down  on  the  stream? 

9.  Do  the  "  Ad  ventures  of  Sinbad  the  Sailor"  in  Arabian  Nights 
suggest  anything  to  you  concerning  the  superstitions  which  might  have 
been  rife  in  the  minds  of  medieval  sailors  ?  Would  such  attitudes  be 
a  serious  handicap  to  commerce?  Compare  the  difference  in  trust- 
worthiness of  the  "weather  eye"  of  a  ship  captain  of  a  century  ago, 
and  the  government  weather  reports  and  prophecies  of  to-day. 

10.  Make  a  list  of  the  things  which  make  sea  travel  less  dangerous 
and  risky  to-day  than  in  medieval  times. 

n.  Outline  the  hindrances  to  medieval  international  trade.  What 
were  the  consequences  upon  the  size  and  character  of  that  trade  ? 

12.  When  the  medieval  merchant  had  a  large  stock  of  goods, 
what  questions  faced  him  in  deciding  where  to  go  with  them?  How 
does  a  modern  merchant  attempt  to  secure  an  answer  to  these 
questions  ? 

13.  Just  what  difficulties  arose  because  of  the  unorganized  finance 
in  medieval  times  ? 


70  OUR   ECONOMIC   ORGANIZATION 

14.  Can  you  indicate  any  ways  in  which  our  banks  and  banking 
systems  help  us  to  overcome  some  of  the  difficulties  of  the  medieval 
merchant  ? 

15.  Is  our  system  of  law  an  aid  to  commercial  organization?  Our 
army  and  navj^? 

16.  Look  up  Venice  in  the  encyclopedia  and  get  information  con- 
cerning its  importance  in  medieval  commerce. 

17.  Make  a  list  of  the  commercial  institutions  of  importance  in  which 
the  Venetian  merchants  instructed  Europe. 

18.  Who  and  what  were  the  merchant  adventurers?  The  staplers? 
The  Hanse  merchants?  ' 

19.  How  could  it  possibly  come  about  that  England  would  export 
wool  to  Flanders  and  then  buy  back  the  cloth  made  from  this  same 
wool?  Do  you  know  of  any  country  to-day  that  exports  some  raw 
material  and  buys  back  a  finished  product  ? 

20.  Can  you  give  any  examples  of  modern  monopoly  in  trade  ? 

21.  Can  j^ou  see  any  similarities  between  the  Flanders  Fleet,  the 
Hanseatic  League,  the  merchant  gilds,  the  later  merchant  adven- 
turers, and  modern  corporations? 

22.  Find  out  what  the  Webb  Act  is  in  cormection  with  our  foreign 
trade  to-day.  Does  it  remind  you  of  an}i:hing  in  medieval  England's 
organization  of  foreign  trade? 

23.  Why  should  the  merchant  adventurers  have  been  given  a 
monopoly?  Could  any  successful  merchant  have  joined  them?  If 
so,  did  they  have  a  monopoly  ?  Is  the  case  parallel  to  that  of  the  gilds  ? 
Is  it  parallel  to  our  modern  patents  and  copyrights  ? 

24.  What  was  the  law  merchant  ?  Whence  came  it  ?  In  what  sense 
was  it  international  law?  What,  if  anytliing,  do  we  owe  to  the  law 
merchant  ? 

25.  Draw  up  a  comparison  of  the  market  and  the  fair.  We  have 
to-day  institutions  bearing  their  names.  Are  they  derived  from  the 
medieval  institutions?     If  so,  have  they  retained  their  old  functions? 

26.  Indicate  the  relative  importance  of  the  fair,  the  market,  and 
the  peddler  in  the  commercial  organization  of  the  time.  Do  these 
agencies  play  as  prominent  a  part  to-day  as  they  did  in  medieval  times? 
If  not,  why  not? 


STRUCTURE    OF   MEDIEVAL    INDUSTRIAL   SOCIETY     71 

27.  Name  as  many  institutions  as  you  can  which  are  engaged  in 
commerce  (the  mail  order  house  and  the  jobber  are  examples).  Which 
of  these  are  new  ?     Which  old  ? 

28.  What  was  the  medieval  doctrine  of  fair  or  just  price?  What 
were  some  of  the  church  theories  with  respect  to  commerce?  What 
aid  to  commerce  came  from  the  church? 

29.  Does  government  aid  more  in  trade  and  commerce  to-day  than 
it  did  in  medieval  England  ?     If  so,  in  what  ways  ? 

30.  Give  a  number  of  illustrations  showing  specialization  in  modern 
commerce.  Is  a  railroad  a  specialist?  Is  a  collection  agency?  Is  a 
retail  clothing  store?     A  butcher  shop? 

31.  What  is  meant  by  sajing  that  medieval  commerce  was  non- 
f unctionalized  ?  To  what  agencies  do  men  in  modern  business  turn 
over  the  functions  of  transportation?  Advertising?  Production? 
Gathering  of  market  information? 

32.  Why  were  financial  panics,  commercial  crises,  and  industrial 
depressions  unknown  in  medieval  England  ?  What  kinds  of  economic 
disasters  did  medieval  people  fear  ? 

33.  Is  commerce  aided  by  standardized  and  predictable  conditions? 
What  part  should  you  expect  commerce  to  play  in  suppressing  local 
disorder?  In  rendering  social  arrangements  more  certain?  In  stand- 
ardizing legal  codes?     In  preventing  war? 

34.  Try  to  explain  what  is  meant  by  speaking  of  the  "organization 
of  trade"  in  a  country. 

35.  Draw  up  a  comparison  of  medieval  and  modern  commerce 
similar  to  the  comparison  made  in  the  last  study  of  manufacture  in 
the  medieval  town  and  modern  American  manufacture. 

36.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  48-53,  and  Selec- 
tions, 41-62. 

Cheyney,  Industrial  and  Social  History  of  England:  Chapter  IV. 


STUDY  VI 

THE  BEGINNINGS  OF  CAPITALISTIC  AGRICULTURE 
AND  MANUFACTURE 

PURPOSES  OF  THIS  STUDY: 

1.  To  study  some  of  the  causes  which  tended  to  break  up  local  self- 

sufficiency  and  to  lead  to  exchange  cooperation  of  national  and 
even  international  scope. 

2.  To  see  how  these  causes  brought  about  a  new  organization  in  agri- 

culture and  manufacture. 

Modern  organization  differs  greatly  from  the  medieval 
organization.  —  If  we  were  to  summarize  the  preceding  three 
studies  in  two  statements  we  should  say :  first,  we  have  found 
that  the  want-gratifying  machine  or  economic  organization 
of  medieval  England  was  very  different  from  the  one  which 
exists  to-day  ;  second,  we  have  seen  the  beginnings  of  a  system 
of  cooperation  of  specialists  by  means  of  exchange.  In  the 
next  few  studies  we  shall  traverse,  in  seven  league  boots,  the 
period  from  medieval  times  to  the  present  day.  In  this 
period,  exchange  cooperation  becomes  the  dominant  form  of 
want-gratification.  This  development  was  attended  by  so  great 
changes  in  methods  of  production,  in  social  classes,  in  mental 
outlook  —  in  brief,  in  our  entire  social  organization,  that  we 
commonly  say  that  we  are  living  in  a  different  world. 

In  this  lessoti  we  shall  observe  some  of  the  more  significant 
changes  which  occurred  in  the  organization  of  agriculture  and 
manufacturing.  In  the  next  lesson  we  shall  study  the  rise  of 
the  modern  organization  of  trade  and  commerce. 

The  manorial  organization  tended  to  change.  —  A  point 
which  was  much  emphasized  in  our  study  of  the  economic 

72 


CAPITALISTIC  AGRICULTURE   AND  MANUFACTURE      73 

organization  of  the  manor  was  its  fixity,  its  static  nature,  its 
control  by  unvarying  custom.  We  must  not  forget,  however, 
that  even  in  the  most  static  period  there  were  some  conditions 
which  tended  to  break  up  the  manorial  system.  The  inhab- 
itants of  the  manor,  and  especially  its  officials,  attended  fairs 
and  markets  —  and  this  with  increasing  frequency  as  time 
went  on.  The  medieval  bards  and  travelers  brought  in 
interesting  stories  of  the  outside  world.  Foreign  wars  occa- 
sionally served  to  arouse  interest  in  affairs  away  from  the 
home.  Villains  did  sometimes  escape  to  towns  and  become  free 
men.  The  developing  town  life  in  many  ways  helped  to 
weaken  manorial  stability. 

The  change  in  social  classes.  —  One  of  the  most  significant 
factors  connected  with  the  break-up  of  the  manorial  system 
was  the  development,  through  several  centuries,  of  new  social 
classes  on  the  manor. 

There  were  many  ways  in  which  the  serf  or  villain  could 
become  a  free  man.  He  might  be  freed  by  his  lord  as  an  act 
of  kindness  or  of  gratitude  for  some  service  rendered ;  he 
might  become  free  by  running  away  to  a  town ;  or  by  purchasing 
his  liberty ;  or  by  entering  the  ranks  of  the  clergy  —  a  method 
somewhat  frequently  used  after  the  Black  Death  had  greatly 
depleted  the  priesthood.  More  important,  however,  than  all 
these  was  the  method  called  "  commutation  of  services." 
Oddly  enough  this  method  did  not  seem  to  lead  to  freedom  at 
all,  at  least  in  the  earlier  daj^s. 

It  will  be  remembered  that  the  medieval  villain  owed  certain 
services  to  his  lord  which  were  fairly  burdensome,  involving 
indeed  about  half  his  working  time.  As  the  use  of  money 
became  more  common,  the  villain  often  preferred  to  pay  a  sum 
of  money  to  his  lord  instead  of  rendering  these  services.  He 
used  his  time,  which  was  thus  set  free,  in  working  for  others  or 
in  raising  products  for  sale  at  the  markets  and  fairs.  This 
commutation  of  services  was  often  as  pleasing  to  the  lord 
of  the  manor  as  it  was  to  the  villain.  The  lord  frequently 
had  need  of  money  for  use  in  a  foreign  war,  such  as  the  Hundred 


74  OUR   ECONOMIC   ORGANIZATION 

Years'  War,  or  for  use  on  such  a  pilgrimage  as  a  crusade,  or  for 
living  in  town  or  at  the  king's  court.  The  commutation  of 
services  did  not  in  itself  free  the  villain,  but  in  course  of  time 
it  became  impossible  to  distinguish  him  from  the  freeman, 
since  the  freeman  typically  made  money  payments  instead 
of  rendering  services.  By  1450,  perhaps  half  of  the  villains 
had  been  freed  by  this  method  and  certainly  by  1600  serfdom 
was  at  an  end.  No  laws  were  passed  making  the  villains  free ; 
there  was  no  emancipation  proclamation.  It  simply  became 
impossible  to  distinguish  them  from  free  men  because  their 
rights  and  duties  were  like  those  of  free  men. 

The  movement  had  been  hastened  by  a  great  pestilence 
called  the  Black  Death  which  swept  over  England  about 
the  middle  of  the  fourteenth  century  and  carried  away  nearly 
half  of  the  entire  population.  This  meant  such  a  great  scarcity 
of  labor  that  the  villains,  and  indeed  all  other  workers,  were 
put  in  a  strong  position.  The  lords  were  so  anxious  to  get 
help  in  the  fields  that  a  villain  who  ran  away  to  another  manor 
was  likely  to  be  treated  as  a  free  tenant,  or  to  be  hired  at  good 
wages  by  his  new  lord  instead  of  being  punished  and  sent  back, 
as  had  formerly  been  his  lot.  One  who  chose  to  remain  in  his 
old  home  was  likely  to  be  able  to  arrange  quite  easily  for  a 
commutation  of  his  services.  Either  course  spelled  freedom. 
It  ought  to  be  noticed,  too,  that  the  Black  Death  weakened  the 
fixity  and  stability  of  the  old  S3^stem  because  of  the  mental 
agitation  and  turmoil  and  flight  from  plague-infested  regions 
which  attended  the  catastrophe. 

The  new  organization  in  agriculture.  —  The  conditions  we 
have  been  describing  gradually  led  to  an  organization  of  agri- 
culture quite  different  from  that  of  the  old  manorial  system. 
Under  the  old  arrangement,  the  lord  of  the  manor  received 
nearly  all  his  income  in  farm  products  and  he  spent  most  of  his 
time  at  the  manor  consuming  the  goods  which  were  turned  over 
to  him.  During  the  fourteenth  and  fifteenth  centuries,  however, 
he  found  his  situation  a  difficult  one.  Serfdom  was  a  decaying 
institution  ;  the  rents  from  his  mills  and  the  other  monopolies  of 


CAPITALISTIC  AGRICULTURE   AND  MANUFACTURE      75 

the  time  on  his  manor  declined  with  the  dechne  in  the  number  of 
tenants,  as  did  also  the  amounts  of  payments  in  kind  and  the 
fees  and  fines  from  his  courts.  A  new  organization  of  affairs 
could  hardly  fail  to  appeal  to  him  and  this  new  organization 
was  made  easily  possible  by  the  increasing  use  of  money  pay- 
ments. It  gradually  became  common  for  the  lords  to  turn  over 
the  management  of  their  estates  to  some  freeman  or  to  some 
enterprising  villain  in  a  way  not  greatly  different  from  the  lease 
of  a  farm  to-day  by  a  tenant.  The  tenant  or  "  farmer  " 
("  farmer  "  comes  from  firma  meaning  "  definite  sum  ")  leased 
the  land  for  a  definite  sum  and  employed  others  as  farm 
laborers.  This  system  was  one  of  contract  instead  of  custom  ; 
that  is,  instead  of  doing  just  as  they  had  always  done,  thej^  bar- 
gained and  reached  an  agreement.  The  parties  concerned  were 
relatively  free  to  make  as  good  a  bargain  as  they  could. 

Still  another  factor  had  hastened  the  emancipation  of  the 
villain  and  the  rise  of  a  new  system  of  agriculture.  For  various 
reasons  the  demand  for  English  wool  had  grown,  and  sheep- 
raising  had  become  profitable.  The  high  price  of  labor,  result- 
ing, in  part,  from  the  Black  Death,  increased  the  profitableness 
of  sheep-raising  as  compared  with  other  agricultural  pursuits, 
since  only  a  small  working  force  was  necessary  on  a  "  sheep- 
run."  To  raise  sheep  successfully,  however,  it  was  necessary 
to  break  away  from  the  open  field,  strip  system  and  include 
large  areas  of  land  in  an  inclosure  or  pasture.  On  most  estates 
these  strips  were  still  held  by  tenants  under  the  old  customary 
rights.  Many  landowners,  and  this  term  now  included  wealthy 
merchants  who  were  continually  buying  estates,  desired  to 
inclose  these  holdings  and  go  into  the  business  of  raising 
sheep.  By  purchase,  by  fraud,  by  threats,  and  even  by  open 
violence,  the  tenants  concerned  were  separated  from  their  hold- 
ings on  a  very  large  scale.  These  operations  have  been  called 
"  the  first  inclosure  movement."  The  dispossessed  tenants 
either  became  agricultural  laborers  or  went  to  the  towns.  Thus 
the  serfs  and  the  slaves  became  freed  from  the  land,  and  such 
freemen  as  did  not  move  to  the  towns  and  become  merchants 


76  OUR  ECONOMIC   ORGANIZATION 

or  craftsmen  or  workers  for  hire,  became  tenants  or  agricultural 
laborers.  The  landed  gentry,  the  tenants,  and  the  agricultural 
laborers  constituted  the  new  agricultural  classes. 

While  considering  the  changes  which  occurred  in  agriculture 
we  must  not  fail  to  take  account  of  the  progress  which  occurred 
in  agricultural  methods  during  the  sixteenth,  seventeenth,  and 
early  eighteenth  centuries,  although  this  progress  resulted 
largely  from  the  forces  mentioned  in  the  next  paragraph.  It 
is  true  that  the  improved  methods  did  not  have  general  appli- 
cation until  after  1750,  but  they  had  been  gradually  introduced 
prior  to  that  time  and  were  in  part  made  possible  by  inclosures. 
It  is  hard  to  realize  how  little  the  early  English  farmer  knew 
of  grains  and  vegetables  that  are  well  known  to  us.  In  this 
period,  farmers  began  to  try  some  of  the  crops  raised  on  the 
continent  of  Europe.  Turnip  culture  was  borrowed.  Waste 
lands  were  cleared  and  given  over  to  cultivation.  Marshes 
and  fens  were  drained  —  thanks  to  Dutch  engineering  skill. 
Writings  began  to  appear  on  agricultural  subjects.  In  brief, 
English  agriculture  was  prepared  for  the  next  great  step  forward. 

World  forces  made  for  change.  —  From  this  discussion  of 
the  changes  in  agricultural  life,  it  is  easily  seen  that  within 
England  itself  there  were  great  forces  making  for  change.  If, 
however,  we  are  to  understand  the  later  course  of  this  progress 
in  agriculture,  and  particularly  if  we  are  to  understand  the 
changes  which  took  place  in  the  towns  and  in  trade  and  com- 
merce, we  must  lift  our  eyes  from  England  to  look  at  world 
happenings.  These  happenings  were  phases  of  the  great  world 
movement  which  has  been  called  the  opening  of  the  modern 
era.  Among  them  were  the  invention  of  the  compass,  the  great 
geographical  explorations  and  discoveries,  the  invention  of 
the  printing  press  and  the  development  of  printing,  the  renais- 
sance, the  religious  reformation,  and  the  rise  of  strong  central 
governments. 

Explorations  and  discoveries.  —  Of  all  the  hindrances  to 
commerce  during  the  medieval  times  none  was  greater  than  the 
difficulty  sailors  had  in  finding  their  way  when  out  of  sight  of 


CAPITALISTIC  AGRICULTURE  AND  MANUFACTURE      77 

land.  They  had  no  satisfactory  guide.  A  crude  form  of 
compass  had  long  been  used  by  the  Saracens  who  magnetized 
a  needle  and,  fastening  it  to  a  piece  of  wood,  floated  it  in  a  cup 
of  water.  This  compass  was  very  unstable  and  uncertain 
and  it  was  not  until  it  was  improved,  during  the  fourteenth 
and  fifteenth  centuries,  that  it  became  a  trustworthy^  guide. 
In  this  period,  also,  the  astrolabe,  which  enabled  one  to  deter- 
mine roughly  his  position  at  sea,  came  into  use.  Mariners 
could  now  venture  far  to  sea  with  comparative  safet}'.  The 
basis  had  been  laid  for  the  great  geographical  discoveries. 

The  spirit  of  exploration  had  gradually  been  developing. 
Fabulous  stories  from  merchants  who  had  visited  India  and 
other  eastern  countries,  and  from  such  travelers  as  Marco 
Polo,  stimulated  the  interest  in  the  Orient  which  was  already 
strong  because  of  its  rich  trade.  Since  water  routes  were 
cheaper  and  better  than  land  routes  many  people  tried  to  find 
a  water  route  to  India.  The  exploration  of  the  west  coast  of 
Africa  by  the  Portuguese,  the  rounding  of  the  Cape  of  Good  Hope 
by  Diaz  in  1489,  the  discovery  of  America  by  Columbus  in 
1492,  the  reaching  of  India  via  the  coast  of  Africa  in  1497,  the 
voyage  around  the  world  completed  by  Magellan's  crew  in  1522 
all  give  evidence  of  the  fervor  which  possessed  men  for  explora- 
tion and  discovery. 

Our  interest  in  these  explorations  and  discoveries  comes 
from  the  fact  that  they  opened  new  lands  for  trade,  paved  the 
way  for  the  development  of  colonies  which  still  further  stimu- 
lated trade,  widened  men's  horizons  to  take  in  the  world  in- 
stead of  merely  their  petty  local  interests,  and  resulted  in 
pouring  a  vast  quantity  of  gold  and  silver  into  the  currencies 
of  Europe.  This  stimulated  the  breakup  of  serfdom  by  making 
it  easier  to  make  payments  for  commuted  services,  and  excited, 
in  both  town  and  country,  the  development  of  enterprise  for 
gain  rather  than  merely  for  subsistence. 

Factors  which  increased  mental  activity.  —  About  1450  the 
invention  of  printing  from  movable  tj'^pe  occurred.  As  long 
as  men  had  to  depend  on  manuscripts  written  out  painstakingly 


78 


OUR   ECONOMIC   ORGANIZATION 


by  hand,  or  on  pages  printed  from  carved  blocks,  a  widespread 
knowledge  of  the  world  we  live  in  was  not  likely  to  be  acquired, 
and  not  likely  to  be  retained  after  it  had  been  acquired.  With 
the  invention  of  the  printing  press  of  the  movable  type  kind, 
conditions  changed  greatly.  "  The  world  was  reduced  to 
print."  When  one  thinks  of  the  amount  of  reading  we  do 
nowadays  and  what  limited  beings  we  would  be  without 
printed  matter  as  a   means   of   communication,    one   realizes 

the  tremendous  impor- 
tance of  this  invention. 
Many  times  we  have 
seen,  both  directly  and 
indirectly,  the  impor- 
tance of  "men's  minds  " 
in  the  process  of  active 
adaptation.  Two  great 
movements  affecting 
mental  outlooks,  the 
religious  reformation 
and  the  renaissance, 
occurred  in  the  period 
we  are  studying.  These 
movements  led  to  new 
ways  of  thinking  and 
acting,  —  in  brief,  to  a 
Primitive  Printing  Press  new  intellectual  life,  all 

Compare  the  work  necessary  to  make  duplicate  of  which  reacted  power- 
copies.  once  the  type  is  set.  with  the  work  of  re-  f^^jj      ^^   ^^,^^y.  ^^^^_ 

copying  by  hand-  -^  ' 

tomary  methods  of 
doing  things.  The  renaissance,  starting  in  Italy  and  spreading 
over  the  rest  of  western  civilization,  meant  literally  a  "  new 
birth"  of  art,  science,  and  literature,  which  in  these  realms  fi-eed 
men's  minds  from  "  authority  "  and  made  them  inquiring,  just 
as  the  great  religious  reformation  did  in  the  realm  of  religious 
thinking.  The  importance  of  alert,  active  minds  as  an  aid  in  our 
struggle  for  want-gratifying  goods  cnnnot  well  be  overestimated. 


CAPITALISTIC  AGRICULTURE  AND  MANUFACTURE      79 

Strong  central  governments  grew  up.  —  The  manors  and 
towns  of  early  medieval  England  acted  in  some  ways  like 
independent  political  units.  For  example,  one  manorial  lord 
might  make  war  against  another ;  one  town  might  enter  into 
trade  relations  with  another,  much  as  countries  do  now.  Both 
manors  and  towns  acknowledged  the  overlordship  of  the  king, 
but  the  king,  who  represented  the  nation  as  a  whole,  was  at 
that  time  very  weak ;  the  towns  and  lords  of  the  manors  were 
powerful.  During  the  period  between  1400  and  1750  great 
changes  took  place  in  the  matter  of  political  strength.  Some 
strong  kings  came  to  the  throne  and  unified  the  nation.  The 
king's  court  supplanted  the  manorial  courts ;  national  regu- 
lations supplanted  those  of  the  gilds.  Gradually  the  national 
government  came  to  be  the  one  which  regulated  the  economic 
or  business  affairs  of  the  nation.  It  took  charge  of  taxation ; 
improved  the  roads,  which  had  formerly  rendered  trade  and 
commerce  so  difficult ;  punished  robbers ;  established  better 
systems  of  coinage,  weights,  and  measures  ;  and  did  many  other 
things  which  made  people  safe  and  trade  less  difficult.  Some- 
times we  call  this  movement  which  took  place  both  in  England 
and  on  the  continent,  the  rise  of  strong  central  governments ; 
sometimes  we  call  it  the  decay  of  feudalism.  The  name 
matters  little ;  the  fact  that  the  economic  unit  ceased  to  be  the 
petty  locality  and  became  the  nation  is  highly  significant. 

Changes  in  manufactures.  —  The  changes  which  occurred  in 
manufactures  were  due  to  these  great  world  movements  we 
have  been  describing  in  the  sense  that  these  movements  en- 
larged the  market,  led  to  a  demand  for  increased  productivity^, 
and  provided  new  instruments  and  agencies  of  regulation  and 
control.  As  was  true  of  the  agricultural  changes,  much  of  the 
progress  in  manufacturing  is  to  be  attributed  to  forces  which 
were  in  operation  prior  to  the  opening  of  the  modern  era. 
The  great  forces  which  came  into  play  at  that  time  merely  in- 
creased those  already  in  operation. 

Changes  which  took  place  in  the  cloth-making  industry  will 
serve  as  a  very  good  sample  of  what  occurred  in  other  forms  of 


80  OUR   ECONOMIC   ORGANIZATION 

manufacture,  for  the  cloth-making  industry  was  an  early  and 
very  important  form  of  English  manufacture. 

The  gilds  declined  in  importance.  —  During  the  medieval 
period  the  manufacture  of  cloth  in  England  had  been  primarily 
for  the  needs  of  the  town  and  neighborhood  and  it  had  been 
controlled,  as  we  know,  by  the  gilds.  This  form  of  control 
was  satisfactory  in  the  days  of  the  local  market.  Gradually, 
however,  the  position  of  the  gild  was  weakened. 

Many  causes  contributed  to  the  decline  of  the  gilds.  For  one 
thing,  the  rise  of  coherent  town  governments,  operating  as  agents 
of  the  national  government,  meant  the  transfer  of  many  of  the 
tasks  of  control  which  had  formerly  made  the  gilds  so  powerful 
from  the  gild  to  the  municipality  and  to  the  nation.  The 
gild  was  thus  less  able  to  control  any  one  who  might  wish  to 
challenge  its  power.  For  another  thing,  the  rise  of  a  strong 
foreign  demand  for  English  cloth  and  the  inability  of  the  gild  to 
regulate  dealings  for  foreign  markets  demonstrated  the  unfitness 
of  a  local  agency  to  cope  with  national  and  international  prob- 
lems. Again,  even  in  the  days  when  the  gilds  were  most 
strongly  organized  they  had  found  it  difficult  to  keep  control  of 
every  manufacturer.  Always  some  restless  spirit  was  fighting 
their  monopoly.  This  difficulty  was  greatly  increased  when  the 
government  adopted,  about  1325,  a  policy  of  encouraging  foreign 
cloth-makers  to  settle  in  England  and  carried  out  this  policy, 
somewhat  intermittently  it  is  true,  in  later  centuries.  These 
foreigners  did  not  always  become  gildsmen.  They  might  settle 
in  towns  where  gilds  were  weak  or  in  rural  districts  which  the 
gilds  did  not  control,  and  there  carry  on  their  crafts  free  from 
local  supervision.  Furthermore,  the  inclosure  movement 
caused  many  people  to  leave  the  manors  and  to  seek  employ- 
ment in  craftsmanship.  These  persons  would  carry  on  their 
work  in  suburbs  or  in  the  country  where  such  onerous  regu- 
lations as  the  seven-year  apprenticeship  rule  did  not  apply. 

It  must  be  admitted  that  the  gilds  got  into  difficulties  be- 
cause of  their  own  foolish  actions.  They  had  gained  in  size 
and  strength,  and  many  of  their  members  had  become  wealthy, 


CAPITALISTIC  AGRICULTURE   AND   MANUFACTURE      81 

with  the  result  that  they  became  grasping  and  arbitrary  rather 
than  filled  with  a  desire  for  service.  They  made  their  member- 
ship requirements  increasingly  burdensome.  Sometimes  they 
would  not  accept  apprentices  unless  the  apprentices  would 
promise  to  make  no  effort  to  get  into  the  gild  after  they  had 
finished  their  apprenticeship.  In  other  cases  very  large  fines  or 
admission  fees  were  assessed  upon  those  who  wished  to  enter. 
To  such  an  extent  did  they  carry  these  practices  that  organiza- 
tions of  journeymen,  which  were  in  some  ways  like  our  modern 
trade  unions,  sprang  up  to  protect  the  journeyman  against  the 
arbitrary  practices  of  the  master  craftsmen. 

Finally,  while  these  various  changes  were  undermining  the 
strength  of  the  gilds,  they  were  dealt  a  blow  from  quite  another 
direction.  The  gilds  combined  religious  dutieis  with  their 
other  work  and  when  in  1547,  as  one  event  in  the  Religious 
Reformation  in  England,  all  property  devoted  to  religious 
purposes  was  confiscated,  the  gilds  suffered  severe  financial 
losses. 

The  decline  of  the  gilds  has  a  double  significance  to  us.  It 
marked  the  turning  point  toward  national  and  even  inter- 
national economic  units  as  opposed  to  local  units,  and  it  freed 
industrial  activity  from  the  customary  rules  and  regulations 
of  a  controlling  agency  dating  back  to  early  medievalism. 
Business  was  to  have  a  freer  hand  in  meeting  the  new  problems 
which  world  expansion  brought  to  it. 

A  new  organizer  —  the  clothier.  —  The  spread  of  manu- 
factures from  the  towns  into  the  rural  districts  in  order  to  escape 
the  supervision  of  the  gilds  greatly  hastened  the  development 
of  a  new  figure  in  the  cloth  industry,  who  came  to  be  called  the 
clothier.  We  do  not  know  exactly  when  or  how  he  originated, 
but  he  seems  clearly  to  have  been  related  to  the  development  of 
manufacturing  for  a  foreign  market  and  to  have  been  connected 
with  it  even  before  the  craftsmen  spread  through  the  country 
districts.  Indeed,  he  probably  stimulated  this  spread.  How- 
ever this  may  be,  once  the  small  manufacturers  had  thus  left 
the  towns,  it  was  obviously  impossible  for  them  to  follow  the 


82  OUR   ECONOMIC   ORGANIZATION 

cloth  abroad  and  make  sure  that  it  had  reached  the  most  profit- 
able market.  It  was  even  difficult  for  many  of  them  to  find 
money  for  purchasing  the  raw  materials  and  the  simple  tools 
which  were  used  in  manufacturing.  Then,  too,  the  process  of 
making  cloth  had  become  much  more  specialized,  partly  as  a 
result  of  the  influence  of  the  specialized  immigrant  cloth  makers. 

It  is  clear  that  under  these  circumstances  there  was  an  oppor- 
tunity for  some  one  to  take  on  the  function  of  organizing  th^e 
scattered  specialists  into  a  systematic  producing  group,  and 
to  furnish  finances  where  necessary.  The  clothiers,  who  under- 
took this  work  in  the  cloth-making  industry,  either  raised  the 
wool  themselves  or  bought  it  from  the  grower  or  in  one  of  the 
numerous  wool  markets.  They  then  delivered  it  to  the  various 
spinners  and  when  the  spinning  was  done  carried  the  yarn  to  a 
weaver  who  made  it  into  cloth.  The  weaver  did  not  own  the 
yarn  or  the  cloth.  He  merely  worked  on  it  for  the  clothier. 
When  the  weaving  was  completed  the  clothier  took  the  cloth 
to  other  specialists  —  the  dyer,  the  fuller,  the  shearer,  the 
dresser,  and  so  on  —  all  the  time  keeping  the  ownership  of  the 
product  himself  and  paying  each  artisan  for  his  work.  In  some 
cases,  the  dependence  of  the  country  artisan  upon  the  clothier 
was  especially  great  in  that  the  clothier  not  only  furnished  the 
raw  materials  and  marketed  the  finished  product,  but  also 
furnished  the  tools  with  which  the  artisan  worked.  We  even 
have  records  of  clothiers  gathering  several  score  of  workers  into 
one  building,  furnishing  in  this  case,  of  course,  both  tools  and 
building. 

Typically,  however,  the  artisans  who  worked  for  the  clothier 
were  scattered  about  the  countryside  working  in  their  own 
small  shops  or  in  rooms  of  their  own  homes ;  hence,  perhaps, 
the  name  "  domestic  system."  It  is  easy  to  see  that  "  the 
clothier  occupied  a  very  responsible  and  prominent  position 
in  the  local  community.  He  was  an  organizer  of  the  manu- 
facture, of  the  labor,  and  of  the  distribution  of  materials.  His 
shop  was  a  neighborhood,  a  village  and  its  environs.  He  was 
the  moneyed  man,  the  paymaster,  and  the  employer  of  the 


CAPITALISTIC  AGRICULTURE  AND  MANUFACTURE      83 


whole   vicinity.     The   neighborhood    activity   and   prosperity 
rested  in  his  hands."  ^ 

The  organization  of  manufacture  of  cloth  under  the  domestic 
system  may  be  illustrated  by  the  following  diagram : 


Dyers 


CLOTHIER 


Spinners 


Wool  Markets  or 

Raisers  from  whom 

Wool  could  be 

Purchased 


Organization  for  the  Manufacture  of  Woolen  Cloth  under  the 
Domestic  System 

Notice  the  clothier,  who  retains  the  ownership  of  goods,  as  an  organizer 
of  speciaHsts. 

The  extent  of  the  changes  sketched  in  this  chapter  may  be 
more  readily  seen  from  the  following  comparative  statement. 

Comparison  of  IVIanufacture  under  the  Handicraft  System 
AND  THE  Domestic  System 


Under  the  handicraft  system 
Small-scale  industry,  small  shops  ; 

few  people  in  each. 
Mostly      tool      industry;    small 

amount  of  machinery. 
Processes  of  manufacturing   few 

and  simple. 

'  Adapted  from  R.   B.   Westerfield,   Middlemen  in  English  Business. 
the  Conn.  Academy  of  Arts  and  Sciences,  XIX,  pp.  205-279,  29G-317. 


Under  the  domestic  system 
Conditions  were  similar. 

Conditions  were  similar. 

Conditions  were  similar. 


Tranaactions  of 


84 


OUR   ECONOMIC   ORGANIZATION 


Comparison  of  Manufacture  under  the  Handicraft  System 
AND  the  Domestic  System — Conlinued 


Under  the  handicraft  system 
Work  done  in  small  shops  and  gen- 
erally in  the  home  by  single 
worker  or  by  very  small  groups. 
Workers  (craftsmen)  controlled 
hours  and  conditions  and  place 
of  work  and  owned  own  tools. 

Worker  (craftsman)  performed  all 
processes  on  a  given  piece  of 
work. 

Worker  owned  raw  materials  and 
finished  product. 

Production  for  small,  local  mar- 
ket ;  relations  between  producer 
and  consumer  quite  personal. 

Local  regulation  of  business. 

Not  a  wage  system,  except  for 

journeymen. 
Few  or  no   middlemen   between 

producer  and  consumer. 


Under  the  domestic  system 
Conditions  were  similar. 


Conditions  were  similar  except 
that  workers  were  occasionally 
divorced  from  the  ownership  of 
the  tools. 

Conditions  were  similar,  though 
work  \\'as  more  specialized. 

Worker  frequently  divorced  from 
ownership  of  raw  materials  and 
finished  product. 

Production  for  wider  market 
(sometimes  foreign) ;  relation 
between  producer  and  consumer 
less  personal. 

National  regulation  of  business: 
Mercantilism.     (See  p.  120.) 

A  wage  system. 

Functional  middlemen  and  spe- 
cialized middlemen  within 
given  trade. 


PROBLEMS 

1.  "There  were  forces  tending  to  break  up  the  manorial  system  as 
early  as  the  thirteenth  century.  In  particular  there  were  :  (1)  the 
substitution  of  money  payments  for  produce  and  lahor  rents,  (2)  the 
leasing  of  the  manor  by  the  bailiff,  the  tenants  or  others,  (3)  exchange 
between  manor  and  town,  and  (4)  external  relations  (notably  the 
crusades)."  Show  how  each  of  these  factors  would  bring  changes  in 
the  manorial  system. 

2.  Explain  commutation  of  services.  What  effect  did  the  crusades 
have  upon  commutation  of  services?     How  did  commutation  tend 


CAPITALISTIC  AGRICULTURE  AND  MANUFACTURE      85 

to  change  the  medieval  system  of  agriculture?     Why  would  a  lord 
ever  agree  to  commutation  of  services  ? 

3.  Do  we  have  several  classes  in  agricultural  work  in  the  United 
States  to-day?    If  we  do,  name  them. 

4.  In  what  ways  did  the  Black  Death  contribute  to  the  break-up 
of  the  manorial  system?  Do  you  think  the  break-up  would  have  oc- 
curred if  there  had  been  no  Black  Death  ? 

5.  What  changes  would  need  to  be  made  in  a  manorial  estate  to 
convert  it  into  a  sheep  run?     What  difficulties  would  be  in  the  way? 

6.  "  The  lease  system  was  largely  one  of  contract ;  the  old  system 
had  been  one  of  custom."  Explain.  Which  was  more  nearly  like  our 
present  system?  "Farming  for  profit  in  England  began  with  the 
lease  system."  Is  this  true?  Wliy  had  men  farmed  on  the  manor? 
For  what  do  they  farm  now? 

7.  If  you  had  been  a  merchant  in  the  Early  Middle  Ages  and  had 
been  making  large  profits  in  trade,  would  you  have  considered  it 
desirable  to  invest  in  land?  Would  your  feeling  have  been  different 
after  the  lease  system  grew  up?     Explain. 

8.  Inclosure  was  clearly  beneficial  for  sheep  culture.  Did  it  help 
in  bringing  in  new  methods  of  cultivating  the  soil  ? 

9.  Report  on  the  discovery  and  development  and  use  of  the 
astrolabe  and  compass. 

10.  What  reasons  would  there  be  for  saying  that  a  trip  around 
Africa  in  1497  was  a  far  greater  exploit  than  a  trip  around  the  world 
to-day? 

11.  Look  up  "printing,"  tell  something  of  its  invention  and  of  the 
principal  phases  in  its  development,  including  some  description  of  a 
modern  printing  press. 

12.  What  is  meant  by  sajang  that  people's  habits  of  thought  and 
ways  of  viewing  the  world  will  have  much  to  do  wath  inventions  and 
other  changes  which  take  place  ? 

13.  Why  would  printing  the  Bible  in  English  tend  to  loosen  the 
control  of  the   church  over   English-speaking  people?     Look  up  the 


86  OUR  ECONOMIC  ORGANIZATION 

Renaissance  in  an  encyclopedia  and  report  what  it  was,  when  it  hap- 
pened, and  what  it  meant  to  the  world. 

14.  Look  in  an  encyclopedia  or  an  English  history  for  infonnation 
about  icings  Henry  VII  and  Henry  VIII  of  England.  Report  concern- 
ing what  these  kings  did  to  make  the  central  government  stronger,  to 
weaken  the  power  of  the  lords,  and  to  break  the  control  of  the  church. 

15.  Why  should  improved  coinage  make  trade  easier? 

16.  Why  was  it  better  to  have  taxation,  road  improvement,  and  the 
punishment  of  robters  in  the  hands  of  the  central  government  rather 
than  in  the  hands  of  a  number  of  lords  ? 

17.  Make  a  list  of  five  events  taking  place  between  1400  and  1700 
that  tended  to  widen  the  market  for  English  goods. 

18.  Make  a  list  of  influences  that  tended  to  break  the  strength  of 
the  gilds.     What  were  Journeymen's  gilds  and  why  did  they  originate? 

19.  The  first  inclosure  movement  meant,  in  large  part,  the  removal 
of  population  from  the  manors.  These  people  would  not  be  welcomed 
by  the  gilds  at  this  time.  What  became  of  them?  Can  you  see  any 
connection  between  this  problem  and  the  decay  of  the  gilds? 

20.  "In  the  fifteenth  century  three  vital  changes  take  place  in  the 
woolen  industry:  (1)  the  weaving  and  allied  branches  of  the  manu- 
facture are  establishing  themselves  in  the  villages  and  hamlets  and 
isolated  cottages  over  the  countryside,  (2)  the  gild  association  drops 
asunder  in  the  woolen  industry,  (3)  a  new  class  of  entrepreneurs  ap- 
pears—  the  clothiers  —  who  now  control  the  process  of  production." 
What  were  the  chief  causes  of  each  of  these  changes?  Where  did  the 
country  weavers  come  from  ? 

21.  Explain  the  various  functions  which  the  clothier  performed  in 
the  cloth  industry.  Should  we  be  justified  in  calling  liim  a  middle- 
man? 

22.  "Nearly  all  the  functions  performed  by  the  modern  manufac- 
turer were  performed  by  the  clothier."  Ex^plain.  Wliat  functions  of 
the  modern  manufacturer  did  he  perform  ? 

23.  "  Under  the  old  system  the  worker  in  any  craft  was  not  dependent 
upon  others.  Under  the  domestic  system  the  artisan  became  a  de- 
pendent." Is  this  statement  true?  If  so,  upon  whom?  Is  the 
artisan  of  to-day  dependent?     If  so,  upon  whom? 


CAPITALISTIC  AGRICULTURE  AND  MANUFACTURE      87 

24.  "  The  worker  under  the  medieval  system  differed  from  the  worker 
of  our  modern  factory  in  that  he  owned  the  implements  with  which  he 
worked."  Is  this  a  true  distinction?  Did  the  worker  in  any  degree 
lose  control  of  the  implements  of  production  with  the  incoming  of  the 
domestic  system? 

25.  "  Divorce  from  the  ownersliip  of  the  implements  of  production 
puts  the  worker  in  a  position  of  dependence."  How?  Dependence 
upon  whom? 

26.  "  Throughout  the  domestic  system,  manufacture,  though  con- 
trolled by  the  capitalists  such  as  the  clothier,  remained  small-scale 
manufacture."  Is  this  statement  true ?  Is  modern  manufacture  large 
or  small  scale  ? 

27.  "  The  laborer  under  the  domestic  system  was  in  a  less  sure  and 
stable  position  than  he  had  been  under  the  old  gild  scheme."  Is  this 
statement  tme?     Explain. 

28.  "  The  clothier  (or  other  merchants  like  him)  was  the  moving  force 
in  bringing  about  the  new  organization  of  industry."  Explain  this 
statement. 

29.  "The  revolutionary  element  of  the  Middle  Ages  was  the  mer- 
chant."    Explain  what  this  means. 

30.  If  you  had  lived  duiing  the  period  we  have  been  studying  in 
this  lesson  and  had  had  money  for  investment,  what  were  some  of  the 
opportunities  that  would  have  been  open  to  you  ? 

31.  What  was  the  origin  of  the  wage-earning  class  of  modern  Eng- 
land? You  have  not  yet  had  the  basis  for  answering  this  question 
fully  at  this  time.  Answer  it  as  best  you  can  with  your  present  informa- 
tion. 

32.  The  manor  and  the  town  were  local  economic  units  and  they 
met  the  need  of  their  day  reasonably  well.  To-day  we  talk  of  the  need 
of  national  units  and  sometimes  even  of  international  units.     Why? 

33.  Draw  up  an  outline  of  the  main  points  of  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  144-150,  and  Se- 
lections, 63-75. 

Cheyney,  Industrial  and  Social  History  of  England:  Chs.  5,  6, 
and  7. 


STUDY   VII 

THE  RISE  OF  THE  MODERN  ORGANIZATION  OF 
TRADE  AND   COMMERCE 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  some  of  the  causes  that  brought  about  a  change  from  the 

medieval  organization  of  commerce. 

2.  To  see  the  many  new  types  of  business  men  who  took  over  part  of 

the  tasks  performed  by  the  early  merchant. 

Great  increases  in  trade  and  commerce.  —  The  changes  in 
agriculture  and  manufacture  described  in  the  preceding  chapter 
were  very  closely  related  to  equally  great  changes  in  trade  and 
commerce.  Indeed,  they  were  all  merely  different  phases  of 
the  development  of  exchange  cooperation,  money  economy, 
and  production  for  gain. 

The  changes  in  trade  and  commerce  were  particularly  striking. 
If  you  think  over  the  events  which  marked  the  opening  of  the 
modern  era,  you  will  notice  that  every  one  of  them  tended  to 
increase  trade  and  commerce.  The  first  nations  to  feel  the 
effects  of  this  were,  naturally,  Spain  and  Portugal.  They 
had  been  leaders  in  explorations  and  discoveries  and  accordingly 
their  merchants  were  the  first  to  open  up  trade  with  the  new 
regions.  For  various  reasons,  the  chief  of  which  was  the  fact 
that  their  previous  development  had  not  prepared  them  for 
the  responsibilities  involved,  these  nations  failed  to  hold  their 
position  of  leadership  and  were  supplanted  by  the  Dutch.  But 
it  proved  that  the  Dutch  also  were  not  equal  to  the  task.  They 
lacked  strong  central  power  and  policy ;  they  relied  too  much 
on  favoritism  which  led  to  coiruption ;  their  limited  resources 


ORGANIZATION   OF  TRADE  AND  COMMERCE         89 

did  not  give  them  sufficient  power  to  struggle  successfully  with 
other  nations. 

In  the  hundred  years,  therefore,  between  1650  and  1750, 
England  stepped  into  the  position  of  commercial  leadership  of 
the  world,  a  position  which  she  has  held  to  this  day.  Her 
geographical  location  was  such  that  the  opening  of  the  new 
lands  placed  her  in  the  center  of  world  commerce ;  her  geo- 
graphical isolation  safeguarded  her  from  foreign  invasion  and 
promoted  both  the  development  of  political  strength  and  the 
estabhshment  of  peace  and  order  so  necessary  to  successful 
business  enterprise.  Her  merchants  and  manufacturers  had, 
as  we  have  seen,  been  developing  methods  of  organization  to 
meet  changing  conditions,  —  an  experience  of  great  benefit 
to  them  in  organizing  to  meet  the  new  world  conditions.  The 
central  government  had  grown  strong  so  that  it  had  behind 
it  the  entire  resources  of  the  nation  when  it  entered  the  arena 
of  world  competition. 

The  world  commerce,  whose  leadership  England  assumed, 
had  grown  to  be  very  great.  In  geographical  range,  the  era 
of  colonization  had  opened  most  of  the  world  to  business  enter- 
prise. Oceans  had  ceased  to  be  barriers,  they  had  become  high- 
ways of  commerce.  True,  they  were  not  as  busy  highways  as 
they  are  to-day,  but  the  commerce  of  the  world  was  quite  large 
as  compared  with  that  of  the  early  medieval  period.  In  that 
period  it  is  doubtful  whether  the  foreign  trade  of  England  for 
a  given  year  was  greater  than  the  amount  which  could  now  be 
carried  on  a  single  trip  of  one  of  our  great  freighters.  By  1700 
it  had  grown  to  some  sixty  millions  of  dollars,  about  evenly 
divided  between  import  and  export  trade.  By  1750,  it  had 
grown  to  over  one  hundred  millions  of  dollars  and  by  1800  to 
over  three  hundred  and  sixty  millions.^ 

While  we  are  impressed  by  the  magnitude  of  England's 
foreign  trade,  we  must  not  forget  that  it  was  built  upon  a  firm 
foundation  of  domestic  trade  and  manufacture.  The  English 
work-shop,  the  English  methods  of  communication,  transporta- 

'  Day,  History  of  Commerce,  p.  205. 


90  OUR  ECONOMIC  ORGANIZATION 

tion,  and  commercial  organization  made  possible  the  great 
foreign  trade  and  at  the  same  time  were  stimulated  by  that 
foreign  trade.  No  definite  figures  can  be  given,  but  there  is 
no  doubt  that  the  volume  of  England's  domestic  trade  was  many- 
times  that  of  her  foreign  trade. 

New  organization  of  trade  and  commerce.  —  Any  story  that 
aimed  merely  at  moderate  completeness  in  its  account  of  the 
changing  organization  which  cared  for  this  rapidly  developing 
trade  and  commerce  would  fill  volumes.  Our  purpose,  which 
is  merely  that  of  securing  an  appreciation  of  how  modern 
structures  emerged,  will  be  served  if  we  omit  details  and  discuss 
the  emergence  of  certain  specialists,  specialized  institutions, 
and  methods. 

When  we  think  of  the  medieval  merchant  who  sold  either 
in  England  or  abroad,  there  comes  to  our  minds  an  unspecialized 
merchant  who  fared  forth  with  his  pack,  his  boatload,  or  his 
shipload  of  goods,  seeking  the  people  to  whom  he  could  sell  at 
a  profit.  We  have  seen  that  he  performed  a  wide  range  of 
tasks.  He  displayed  and  advertised  the  goods  to  the  buyers, 
he  furnished  the  funds  for  financing  his  business,  he  collected 
the  payments,  he  acted  as  policeman  or  soldier  to  protect  him- 
self and  his  goods,  he  bore  the  risks  of  fire,  theft,  accident,  and 
loss.     The  variety  of  his  functions  was  certainly  great. 

As  new  markets  were  opened  both  at  home  and  abroad,  and 
the  volume  of  English  trade  grew,  enterprising  men  began  to 
see  that  a  profit  could  be  made  by  carrying  on  certain  lines  of 
business  which  would  be  an  aid  to  the  merchants  by  relieving 
them,  of  course  for  a  payment,  of  some  of  their  many  tasks. 
These  enterprising  men  specialized  in  certain  functions. 

The  banker  as  a  functionalized  middleman.  —  A  function 
which  was  among  the  first  to  be  taken  over  by  specialists  was 
that  of  finance.  The  merchant  who  wished  to  load  a  ship  with 
goods  and  sail  for  a  foreign  port  would  need  to  be  a  rich  man  to 
undertake  such  a  venture  with  his  own  unaided  funds.  The 
same  was  true  of  the  clothier  who  wished  to  purchase  raw 
materials  and  pay  the  various  artisans  who  manufactured  the 


ORGANIZATION  OF  TRADE  AND  COMMERCE         91 

cloth.  Both  would  frequently  desire  to  borrow  money,  and  their 
cases  were  typical  of  the  whole  business  community.  This 
gave  an  opportunity  to  the  one  business  man  of  the  community 
who  was  most  likely  to  have  a  supply  of  money  on  hand  —  the 
goldsmith.  This  worker  in  precious  metals  naturally  had  a 
considerable  fund  of  precious  metals  of  his  own  and  naturally 
he  had  strong  boxes  for  its  safekeeping.  These  funds  were 
augmented  by  those  of  other  persons  who  had  surplus  cash  and 
brought  it  for  safekeeping  in  the  iron  chests  of  the  goldsmith. 
The  goldsmith,  of  course,  agreed  to  pay  this  money  back  when 
requested.  Practice,  however,  showed  that  few  depositors 
called  for  their  money  at  the  same  time,  so  that  it  was  safe  to 
loan  perhaps  three  fourths  of  it  out  at  interest.  Of  course  it 
was  not  safe  to  loan  all  of  it  as  some  of  the  depositors  would 
come  every  day  or  two  and  ask  for  part  of  their  money.  These 
loans  by  the  goldsmiths  were  the  beginning  of  commercial 
banking,  which  is  the  type  of  banking  that  is  most  familiar 
to-day. 

In  our  study  of  medieval  organization,  we  learned  that  it  was 
considered  immoral  to  accept  interest  in  payment  for  loans. 
So  long  as  this  thought  pervaded  men's  minds,  the  banking 
business  would  obviously  remain  small  and  of  little  importance. 
Among  the  other  changes  which  were  taking  place  in  the  period 
which  we  are  considering,  however,  was  a  new  way  of  thinking 
about  interest.  People  were  beginning  to  see  that  it  was 
possible  to  borrow  money,  use  it  for  some  business  purpose 
which  was  useful  to  the  whole  community,  and  to  make  enough 
return  to  pay  interest  on  the  borrowed  money  and  still  yield 
a  profit  to  the  enterpriser.  People's  thought  had  changed 
enough  on  this  matter  so  that  by  the  laws  of  1545  and  1571 
it  became  legal  to  charge  interest  for  the  use  of  money  if  the 
rate  was  not  higher  than  10  per  cent.  Usury  is  no  longer 
synonymous  with  the  taking  of  interest.  It  now  means  taking 
interest  in  excess  of  the  rate  permitted  by  law. 

The  goldsmith  bankers  who  now  were  financing  the  under- 
takings of  merchants  and  other  business  men,  soon  found  that 


92  OUR  ECONOMIC   ORGANIZATION 

there  was  other  work  of  the  merchant  which  they  could  take 
over  at  a  profit. 

When  goods  are  sold,  payments  must  follow.  If  these  pay- 
ments are  made  in  gold,  there  is  always  danger  of  loss,  from 
robbery,  storm,  or  wreck.  Besides,  if  one  is  making  purchases, 
it  is  not  convenient  to  carry  gold  enough  to  pay  for  a  shipload 
of  goods,  and  it  is  equally  inconvenient  to  carry  home  a  payment 
in  gold  when  one  has  disposed  of  a  large  cargo  of  valuable  wares. 
Merchants  and  goldsmith  bankers  were  not  slow  in  discovering 
a  way  to  avoid  this  handicap  of  gold  payment.  A  merchant 
in  London  would,  for  instance,  deposit  a  considerable  amount 
of  gold  with  a  goldsmith  in  that  city.  In  return  the  goldsmith 
would  give  him  a  receipt  for  the  amount,  with  the  understanding 
that  he  could  transfer  this  receipt  to  any  one  else  and  thus 
transfer  the  ownership  of  the  gold  that  had  been  deposited. 
With  this  receipt  safely  in  his  pocket,  the  merchant  would 
proceed  perhaps  to  Venice  and  purchase  a  shipload  of  goods. 
Instead  of  paying  gold  for  the  goods,  he  would  ask  the  seller 
to  go  with  him  to  the  shop  of  a  Venetian  goldsmith.  The 
London  merchant  would  here  "  sign  over  "  his  receipt  to  the 
Venetian  goldsmith,  thus  making  the  Venetian  goldsmith  the 
owner  of  the  money  which  had  been  deposited  in  London.  The 
Venetian  goldsmith  would  then  pay  the  Venetian  merchant  and 
the  London  merchant  would  thus  succeed  in  paying  for  his 
goods  without  carrying  any  gold  with  him. 

To  make  payments  of  this  sort  possible,  only  two  things  were 
necessary :  first,  the  Venetian  goldsmith  should  have  an 
"  understanding  "  with  the  goldsmith  in  London  so  that  he 
might  know  it  would  be  safe  to  accept  his  receipts ;  second, 
the  payment  of  a  small  fee  by  the  merchants  for  this  accom- 
modation. One  might  ask  how  this  saved  any  shipment  of  gold. 
Would  it  not  now  Ijc  necessary  for  the  London  goldsmith  to  ship 
the  gold  to  Venice?  Such  a  shipment  would  not  be  made,  how- 
ever, —  certainly  not  at  once.  Venetian  merchants  were  also 
traveling  to  London  to  purchase  goods.  These  would  take 
with  them  receipts  or  "  orders  "  from  the  Venetian  goldsmith 


ORGANIZATION   OF  TRADE  AND  COMMERCE  93 

requesting  the  goldsmith  in  London  to  pay  Londoners  from 
whom  they  purchased  goods.  Thus  the  claims  of  one  gold- 
smith would,  over  a  period  of  time,  come  not  far  from  balancing 
or  offsetting  the  claims  of  the  other.  The  movement  of  actual 
gold  necessary  to  balance  the  transactions  would  be  only  a  small 
percentage  of  the  total  transactions. 

As  time  went  on  and  trade  made  it  worth  while  for  more 
goldsmiths  to  go  into  this  business,  "  understandings  "  which 
made  it  possible  for  transactions  to  take  place  in  this  way,  were 
established  among  the  goldsmiths  of  all  the  important  cities 
of  Europe.  It  was  not  long  until  the  profits  in  this  business, 
and  in  making  loans,  became  so  large  that  many  goldsmiths 
forsook  their  craft  work  and  attended  only  to  the  business  of 
aiding  merchants  in  making  their  exchanges  and  in  securing 
funds.  Thus  the.y  became  not  goldsmiths  but  bankers,  and 
from  these  simple  beginnings  developed  a  great  banking  system 
which  now  makes  it  possible  for  business  men  to  borrow,  and 
for  any  one  to  send  payments  to  almost  any  part  of  the  world 
with  little  shipment  of  specie.  The  work  was  so  important 
that  some  governments  set  up  banks  and  many  governments 
encouraged  individuals  to  do  so. 

Functionalized  middlemen  take  on  risk-bearing.  —  There  grew 
up,  in  this  period  also,  companies  which  would  assume  some  of 
the  risks  involved  in  business.  The  gilds  with  their  common 
funds  from  which  money  was  paid  out  to  members  who  suffered 
illness  or  from  which  payments  were  made  to  families  in  which 
the  gildsman  had  died,  practiced  a  simple  form  of  insurance. 
Insurance  on  business  ventures,  however,  seems  to  have  had  its 
beginning  in  insuring  against  the  risks  involved  in  going  to  sea 
with  merchant  cargoes.  In  its  beginning  it  was  practiced  in  this 
fashion.  A  merchant  who  wished  to  send  a  cargo  of  goods  to  a 
distant  market  would  borrow  an  amount  equal  to  the  value  of 
the  ship  and  the  goods.  He  promised  to  repay,  if  the  ship 
returned  safely,  this  sum  plus  an  additional  amount  called  a 
premium.  If  the  vessel  were  lost,  he  paid  nothing.  Later  on 
this  practice  was  reversed  so  that,  in  the  modern  type  of  insur- 


94  OUR   ECONOMIC   ORGANIZATION 

ance,  persons  pay  premiums  in  advance  whether  they  suffer  a 
loss  or  not.  Out  of  the  totals  of  these  premiums,  which  are 
collected  from  a  great  many  people,  the  insurance  company  is 
able  to  pay  the  losses  which  fall  to  some. 

As  early  as  1635  the  records  show  some  proposals  for  estab- 
lishing companies  to  offer  protection  against  the  risks  of  fire. 
It  was  not  until  1667,  however,  that  the  first  real  fire  insurance 
was  undertaken  in  England.  Fire  insurance  at  first  attempted 
to  protect  only  against  the  risks  of  loss  from  burning  buildings, 
but  later  it  was  expanded  to  cover  risks  on  all  sorts  of  goods, 
afloat  or  ashore,  that  were  in  danger  of  loss  from  fire.  Still 
later  came  insurance  to  protect  against  financial  loss  from 
death,  illness,  and  accident. 

To-day  there  are  literally  scores  of  different  forms  of  insurance. 
The  companies  which  transact  this  business  clearly  have  relieved 
merchants  and  other  business  men  of  much  of  the  task  or  func- 
tion of  carrying  the  risks  of  their  businesses. 

New  specialists  —  carriers  and  innkeepers.  —  As  the  amount 
of  business  carried  on  by  merchants  increased,  a  class  of  business 
men  arose  who,  for  a  payment,  offered  to  relieve  the  merchants 
of  the  function  of  transporting  their  own  goods.  These  new 
functional  middlemen  secured  wagons  and  teams  and  offered 
to  carry  goods  on  regular  schedules  between  the  more  important 
towns.  "  Wagoners  "  was  the  name  commonly  applied  to  the 
men  who  first  went  into  this  business,  and  there  were  so  many 
in  this  line  of  work  by  1700  that  it  had  become  quite  the  practice 
for  merchants  to  hire  their  services  in  conveying  goods.  Some- 
times the  chapmen  and  small  peddlers  engaged  in  carrying  goods 
for  other  merchants,  as  well  as  in  carrying  and  trading  in  their 
own.  The  "  wagoners,"  however,  took  over  more  and  more  of 
the  work  of  transportation,  and  many  farmers  also  engaged  in 
this  work  "  on  the  side."  They  would  drive  in  from  the 
country  districts  bringing  to  London  and  the  other  larger 
cities  malt,  corn,  meat,  and  other  country  produce  and  woukl 
carry  back  groceries,  coal,  salt,  wine,  iron,  cheese,  and  other 
supplies  for  the  shopkeepers  and  small  tradesmen  of  the  country. 


ORGANIZATION   OF  TRADE  AND  COMMERCE 


95 


Not  only  did  the  specialists  in  transporting  goods  start  into 
business,  but  other  specialists  undertook  to  transport  the  mer- 
chant as  well.  As  early  as  1608,  a  kind  of  stagecoach  was 
seen  in  London.  Soon  they  became  common  in  London  and 
were  used  in  many  other  places  also.  Before  1700  a  regular 
system  of  stagecoach  service  between  the  important  towns  of 
England  had  been  established.     The  men  who  went  into  the 


An  Old  Stagecoach 

Compare  this  illustration  of  an  early  American  stagecoach  with  the  picture 
of  a  modern  locomotive  on  page  117. 

business  of  common  carrier  for  passengers  soon  learned  that 
their  business  would  be  increased  by  estabhshing  regular  times 
and  places  for  departure  and  arrival.  They,  therefore, 
published  and  scattered  abroad  schedules  of  times  and  rates, 
which  were,  on  a  small  scale,  much  like  the  time-tables  which  we 
now  use  in  connection  with  railroad  service. 

As  carriers  of  goods  and  passengers  increased  in  number  and 
as  the  number  of  merchants  and  travelers  became  greater,  busi- 


96  OUR  ECONOMIC   ORGANIZATION 

ness  operations  were  begun  by  a  new  class  of  specialists  who  were 
quite  important  to  ease  of  trading  and  traveling.  These  were  the 
innkeepers.  Any  one  who  is  familiar  with  hotels  even  in  the  smaller 
modern  cities  knows  how  important  the  hotel  is  to  the  business 
travelers  who  come  to  the  city  to  buy  or  sell  goods.  The  useful- 
ness of  such  establishments  was  early  recognized  as  English  busi- 
ness grew,  and  innkeeping  became  a  common  form  of  business. 

Specialists  take  over  the  function  of  information  carrying.  — 
One  of  the  handicaps  which  we  have  seen  retarding  the  activities 
of  the  medieval  merchants  was  the  difficulty  of  conveying 
information  rapidly  and  without  making  an  actual  journey. 
As  early  as  1638  this  difficulty  was  greatly  relieved  by  the 
establishment  of  the  outlines  of  a  post-office  system  which  pro- 
vided for  the  carriage  of  private  letters  at  fixed  rates.  There 
had  been  some  work  done  by  the  English  post  office  even  before 
this  time,  but  the  speed  at  which  letters  traveled  was  now 
increased,  and  the  financial  affairs  of  the  post  office  were  so 
arranged  that  the  service  became  regular  and  certain.  Besides 
carrying  information,  the  postal  service  carried  light  wares, 
and  this  aided  merchants  in  somewhat  the  same  way  as  the 
parcel  post  system  of  to-day. 

Means  of  communication  in  business  matters  received  a 
tremendous  help  when  in  1621  the  first  Weekly  News  appeared. 
This  was  the  beginning  of  newspapers  in  England.  It  is  said 
that  in  1658  the  first  business  advertisement  appeared  in  a 
newspaper.  After  this  beginning,  however,  information  re- 
garding all  sorts  of  goods  was  given  to  possible  purchasers 
through  this  medium.  The  merchants  found  in  the  news- 
paper, and  in  the  postal  system,  agencies  which  relieved  them  of 
much  of  the  burden  of  gathering  and  disseminating  information. 

The  storage  function  was  taken  over  by  specialists.  — The 
changes  which  we  have  been  describing  brought  still  others 
with  them.  No  longer  did  the  merchant  find  it  necessary  to 
look  out  for  the  storage  of  his  goods  while  they  were  awaiting 
shipment  at  a  port,  or  while  they  were  awaiting  other  transfer 
or  sale.     Here  also,  individuals  saw  that  profit  could  be  made 


ORGANIZATION  OF  TRADE  AND   COMMERCE       97 


by  relieving  the  trader  of  part  of  his  responsibihty  and  built 
storage-warehouses  adapted  to  various  kinds  of  goods  at  the 
places  where  there  was  a  need  for  them. 

The  merchant  was  relieved  of  the  protection  function.  — 
Although  we  cannot  follow  all  of  the  political  changes  which 
were  taking  place  in  England  during  this  time  of  economic 
change,  we  must  keep  in  mind  that  the  central  government  was 
constantly  growing  stronger.  As  the  king  gained  power,  better 
and  better  order  was  established  throughout  the  kingdom. 
During  this  period,  too,  the  navy  was  growing  in  size  and 
strength  and  was  becoming  powerful  enough  to  make  the  sea 
comparatively  safe  for  merchants.  Thus  the  task  of  protecting 
himself,  which,  earlier,  had  been  among  the  important  duties 
of  the  merchant,  was  gradually  taken  over  by  the  government 
and  given  to  the  soldier,  the  sailor,  and  the  policeman. 
Through  his  taxes,  of  course,  the  merchant  helped  pay  for  this 
service  much  as  he  paid  for  the  services  of  insurance  men, 
warehouse  keepers,  carriers,  newspapers,  coachmen,  and  the 
various  other  specialized  middlemen  who  came  to  his  aid. 

A  summary  view.  —  The  manner  in  which  the  functions  per- 
formed in  trade  by  the  medieval  merchant  have  split  up  among 
groups  of  specialists  can  be  made  clearer  by  the  following 
comparative  statement. 


Functions  performed  by  the  medieval 
merchant 

Transporting 

Protecting 

Insuring 

Storing 

Advertising 


Selling 

Gathering  information 


Financing 
Etc.    .     . 


Functions  now  performed  by  special- 
ized middlemen 

Railroads,  ship  lines,  etc. 

Police,  army,  navy. 

Insurance  companies,  etc. 

Warehousemen. 

Advertising  agencies,  newspapers, 

and  other  media. 
Special  salesmen. 
Trade       papers,       goveinment 

agencies,  etc. 
Financial  institutions. 
Etc. 


98  OUR  ECONOMIC   ORGANIZATION 

Specialization  of  middlemen  within  a  given  trade.  — The  rise 
of  the  functional  middleman  described  above  was  only  one 
phase  of  the  specialization  which  occurred.  Another  differen- 
tiation took  place  within  the  various  trades.  A  view  of  the 
specialized  traders  within  the  woolen  industry  will  serve  as 
a  good  sample.^ 

"The  brogger  was  an  agent  or  broker  of  a  manufacturer  or  exporter 
or  big  wool-merchant  or  jobber.  He  made  a  farm-to-farm  canvass 
and  bought  wool.  He  either  packed  it  up  himself  or  employed  a 
specialized  class  of  wool-winders  or  wool-packers.  The  jobber  or  mer- 
chant bought  for  cash  large  volumes  of  wool  seasonally;  he  owned 
warehouses  for  the  storage  of  his  purchases ;  he  sold  to  clothiers  and 
manufacturers  on  credit,  and  in  such  parcels  as  they  needed. 

"The  wool  stapler  assorted  w(?ol  according  to  the  character  of  the 
material.  He  had  large  warehouses  and  required  a  great  capital. 
But  his  special  and  distinctive  function  consisted  in  breaking  and  as- 
sorting wool,  making  it  into  sortments  fit  for  the  manufacturer.  With- 
out the  stapler,  the  clothier  was  under  the  necessity  of  buying  his  wool 
in  the  fleece,  and  unless  he  could  work  up  all  sorts  of  wool,  a  thing  no 
clothier  could  do  to  any  advantage,  he  suffered  a  loss  of  those  parts 
not  used.  The  yarn  merchant  got  wool  from  the  wool  buyer  into  the 
hands  of  the  spinners  in  their  localized  districts  and  then  collected 
and  sold  the  yarn  to  the  clothiers.  He  commonly  combined  the  func- 
tions of  the  wool  stapler  (viz.,  as  sorter,  kember,  washer,  scourer,  and 
trimmer)  with  that  of  the  yarn  merchant  proper. 

"The  clothier  has  been  described  in  another  connection.  The 
clothiers  of  all  England  sold  mostly  through  London  whose  great 
woolen  market  was  an  'exchange'  called  Blackwcll  Hall.  The  factors 
established  themselves  in  Blackwell  Hall  about  1660.  The  first  factors 
were  likely  some  clothiers  or  cloth  workers  with  whom  other  clothiers 
had  left  their  residue  of  cloths  from  one  market  till  a  later  market. 
The  prime  service  of  a  factor  is  to  facilitate  exchanges;  buyers  and 
sellers  are  brought  together  through  specialized  representatives ;  wide 
correspondence  and  connections  swell  the  number  of  buyers ;  there  is 
a  broader,  steadier  market. 

'  This  statement  of  the  oommercial  organization  in  the  woolen  industry  is  adapted  from 
R.  B.  Westorfield,  Middlemen  in  English  Business.  Transactions  of  the  Connecticut 
Academy  of  Arts  and  Sciences,  XIX. 


ORGANIZATION   OP   TRADE   AND   COMMERCE         99 

"The  draper  was  in  the  earher  centuries  both  retailer  and  whole- 
saler of  woolen  cloth.  The  retail  function  became  less  and  less  his, 
and  was  given  over  to  the  merchant.  By  the  middle  of  the  eighteenth 
century  he  was  a  typical  wholesaler.  As  such  he  had  coimections 
(a)  with  the  clotliiers  or  the  factors,  (6)  with  the  merchant  importers 
and  exporters,  (c)  with  the  pro\ancial  wholesalers,  and  (d)  with  the 
retailers  of  London  and  other  towns  and  cities.  Manchester  men  were 
traveling  merchants  of  the  northern  manufacturing  section  who  bought 
mainly  at  the  great  cloth  fair  at  Leeds.  They  sold  wholesale  to  shops, 
ware  housekeepers,  and  to  country  chapmen. 

"The  chapmen,  bought  their  goods  from  wholesale  tradesmen  of  the 
cities  or  from  the  Manchester  men,  and  traveled  on  foot  with  packs 
on  then-  shoulders  or  with  horse  and  panniers,  or  with  horse  and  cart 
or  w^agon. 

"Five  methods  of  marketing  abroad  were  devised  by  the  merchants  ; 
(a)  travelling  merchant,  (6)  supercargo,  (c)  factor,  {d)  foreign  resident  com- 
mission house,  (e)  branch  house.  This  is  roughly  the  historical  order  by 
which  they  rose  to  importance." 

Accounting  systems  come  into  use.  —  It  is  not  hard  to  see 
that  in  the  increasing  business  which  we  have  been  describing, 
much  must  have  been  guess  work  and  chance  unless  the  various 
business  men  were  able  to  guide  their  plans  with  some  system 
of  calculation  and  accounting.  The  machinery  for  calculating 
was  borrowed  by  England  from  Italy.  In  Italy  commercial 
arithmetic  was  developed  and  was  quite  commonly  in  use 
during  the  twelve  hundreds.  The  gilds  in  ancient  times  had 
kept  their  records  in  Latin  and  some  of  them  were  very  loath  to 
abandon  the  use  of  this  language  for  all  official  documents. 
But  Roman  numerals  are  not  convenient  for  calculation.  If 
one  tries  to  multiply,  for  instance,  LXXXVIII  by  XL VII  it  is 
easy  to  see  the  difficulty  which  lay  in  the  way  of  figuring  and 
keeping  accounts  while  such  numerals  were  the  only  ones  known. 
Between  twelve  and  thirteen  hundred,  however,  the  Arabic 
numerals  became  quite  common  in  Italy,  and  were  even  more 
common  in  the  next  century.  During  the  two  hundred  years 
that  followed,  the  practice  of  calculating  in  Arabic  figures  spread 
to  England  and  other  parts  of  Europe,  so  that  during  the  period 


100  OUR   ECONOMIC   ORGANIZATION 

which  we  are  studying  business  men  had  this  instrument  of 
calculation  as  an  aid  to  their  plans. 

Business  plans  of  any  large  size  cannot  be  carried  accurately 
in  one's  mind,  nor  can  the  records  of  what  has  happened  in 
business  be  wisely  intrusted  to  memory.  Therefore,  if  busi- 
ness men  wish  to  record  and  classify  information  which  they 
may  use  in  conducting  their  business  more  wisely  in  the  future, 
it  is  necessary  that  they  shall  "  keep  books."  From  this  need 
has  come  our  whole  science  of  bookkeeping  and  accounting. 
This  invaluable  help  to  business  men  also  came  into  wide  usv'^ 
during  this  era  of  great  business  change.  Accounting,  like 
commercial  arithmetic,  appears  to  have  had  its  beginning 
in  Italy.  As  early  as  1279-80,  the  records  of  certain  of  the 
Popes  were  kept  by  simple  bookkeeping  record,  and  double 
entry  bookkeeping  was  practiced  not  much  later.  Very  good 
records  have  been  found  which  were  kept  by  Venetian  mer- 
chants early  in  the  fourteen  hundreds,  and  from  Italy  came  the 
first  textbooks  which  carried  a  knowledge  of  bookkeeping  and 
accounting  to  the  business  men  of  other  lands. 

Other  financial  and  organizing  aids.  —  Even  in  the  medieval 
period  it  had  not  been  uncommon  for  the  limited  funds  of 
individuals  to  be  multiplied  by  several  men  putting  their  money 
into  a  common  venture.  Such  an  organization  came  to  be 
called  a  partnership.  It  not  only  increased  the  resources  avail- 
able for  a  given  enterprise ;  it  also  lessened  the  amount  of 
risk  for  each  individual  concerned  to  the  extent  that  any  loss 
which  might  occur  would  be  distributed  among  the  partners. 

During  the  period  of  expanding  trade  which  we  are  now 
studying,  the  partnership  came  to  be  used  more  and  more.  This 
period  also  saw  the  development  of  the  great  trading  companies. 
In  our  discussion  of  the  merchant  adventurers  we  saw  the 
reasons  for  the  use  of  the  company  organization  in  foreign 
trade.  They  now  came  into  their  own.  The  accompanying 
map  of  the  spheres  of  trade  of  English  commerce  in  the  early 
seventeenth  century  shows  that  the  area  open  to  trade  for 
Englishmen  as  individuals  embraced  only  Spain,  Portugal,  and 


ORGANIZATION  OF  TRADE  AND  COMMERCE        101 


102  OUR  ECONOMIC   ORGANIZATION 

France.  Trading  with  the  rest  of  the  world  must  be  carried 
on  by  means  of  these  great  companies. 

Some  of  these  companies  were  the  so-called  regulated  com- 
panies about  which  we  already  know.  Others  were  joint  stock 
companies.  Later  we  shall  study  the  various  types  of  business 
organizations,  so  we  shall  not  stop  here  to  study  the  details 
of  a  joint  stock  company.  It  will  be  sufficient  for  us  to 
know  that  they  were  much  like  a  partnership,  excepting  that 
many  people  contributed  their  funds  to  a  common  enterprise, 
in  this  way  making  it  possible  to  accumulate  very  large 
amounts  of  money  for  a  single  venture  and  to  distribute  the 
risks  widely. 

The  gain  spirit.  —  The  account  given  in  the  last  two  studies 
of  the  break-up  of  medieval  organization  shows  that  men  had 
become  possessed  of  a  spirit  very  different  from  that  which  moved 
them  during  the  time  of  the  gilds  and  manors.  Under  the 
manorial  system,  men  worked  merely  for  subsistence ;  that  is, 
they  produced  food  and  other  necessaries  for  their  own  liveli- 
hood. In  the  towns  the  gildsmen  did,  it  is  true,  produce  for  a 
market,  but  it  was  a  very  small  market  and  they  could  not 
hope  to  sell  many  goods  or  to  accumulate  large  amounts  of 
money.  Furthermore,  channels  of  trade  and  methods  of  work 
were  fixed  by  custom,  and  by  gild  rules  which  were  largely  state- 
ments of  custom. 

All  this  is  changed  in  the  period  we  are  now  studying.  The 
old  system,  stable  and  customary,  gave  way  to  one  of  change 
and  opportunity.  There  came  into  manorial  life  production 
for  the  market,  sheep-raising  as  a  business  enterprise,  and  risk 
taking  through  a  lease  system.  There  came  into  town  life  a 
great  change  due  to  expanding  foreign  and  domestic  trade.  The 
conditions  of  this  wide  market  were  such  that  men  had  increas- 
ing opportunity  to  gain  not  merely  a  comfortable  living  but  to 
amass  riches.  The  transition  was  not  yet  complete  —  indeed  it 
is  still  going  on  to-day  —  but  economic  activity  was  guided 
more  than  before  by  the  spirit  of  gain.  More  and  more, 
economic  activity  became  business  for  profit. 


ORGANIZATION   OF  TRADE   AND   COMMERCE        103 

PROBLEMS 

1.  List  again  the  events  marking  the  opening  of  the  modern  era 
and  show  how  each  affected  commerce. 

2.  "England  was  once  on  the  circumference  of  the  world's  trade. 
The  geographical  discoveries  placed  her  at  the  center."  Explain, 
What  other  causes  contributed  to  England's  supremacy  in  commerce? 

3.  Should  you  expect  that  domestic  commerce  (that  is,  trade 
within  the  coimtry)  would  be  larger  than  foreign  commerce  in  the 
United  States  to-day? 

4.  When  were  English  colonies  planted  in  America?  Would  their 
establishment  be  likely  to  increase  England's  commerce? 

5.  Explain  how  the  goldsmith  relieved  the  merchant  of  the  ne- 
cessity of  financing  his  operations. 

6.  Explain  how  the  goldsmith  relieved  the  merchant  of  the  function 
of  transporting  gold  for  payment.  If  Venetian  merchants  purchased 
a  hundred  thousand  dollars'  worth  of  goods  in  London  in  1500  and 
London  merchants  purchased  ninety  thousand  dollars'  worth  in  Venice 
and  ten  thousand  dollars'  worth  in  Florence  in  the  same  year,  what 
plan  of  payments  would  you  suggest  to  keep  the  gold  shipments  as  low 
as  possible? 

7.  Take  a  bank  check  and  explain  how  the  process  of  making  a 
payment  to  another  person  with  a  check  is  similar  to  the  process  de- 
vised by  the  goldsmiths. 

8.  Account  for  the  change  in  feeling  regarding  the  payment  of 
interest  during  the  period  which  we  have  been  studying.  Would  large- 
scale  borrowing  have  been  possible  without  interest  payment? 

9.  Find  out  from  a  bank  the  rate  of  interest  which  is  charged  for 
loans  to  business  men.     Find  out  if  the  rate  changes  from  time  to  time. 

10.  Explain  the  meaning  of  the  world  "premium"  as  it  was  used  in 
connection  with  early  insm-ance.  Why  would  insurance  lend  a  great 
stimulus  to  trade  and  other  business  undertakings  ? 

11.  Do  you  suppose  that  the  "wagoners"  still  exist  in  England? 
If  not,  what  has  taken  their  place?  Are  there  any  "wagoners"  in 
the  town  in  which  you  live?     If  so,  are  they  called  wagoners? 

12.  Should  you  consider  the  stagecoach  with  its  regular  schedule 
a  great  advance  over  medieval  methods  of  tra\'el  ?  Make  a  list  of  the 
"common  carriers"  upon  which  we  rely  for  transportation. 


104  OUR   ECONOMIC   ORGANIZATION 

13.  If  it  were  not  for  common  carriers,  how  would  individuals  get 
about  from  one  place  to  another?  Why  call  a  railroad  a  "common 
carrier"? 

14.  Get  information  from  the  encyclopedia  concerning  the  develop- 
ment of  the  post  office  in  England  and  America  and  report  to  the  class. 

15.  What  are  the  chief  means  of  carrying  information  upon  which 
business  men  rely  in  modern  times  ? 

16.  Why  is  it  desirable  that  common  carriers  and  agencies  for  carry- 
ing information  should  have  regular  time  schedules  ? 

17.  Find  out  from  some  manufacturer  how  seriously  his  business 
would  be  affected  if  all  means  of  communication  from  outside  business 
coimections  were  cut  off  for  two  weeks. 

18.  Do  the  business  men  of  your  town  regularly  use  the  newspapers 
as  means  of  giving  information  about  their  goods?  How  did  the 
medieval  merchant  perform  this  function? 

19.  What  other  agencies  besides  the  newspapers  have  developed  for 
giving  information  of  this  sort?  What  would  be  meant  by  calling 
these  agencies  functionalized  middlemen? 

20.  What  is  meant  by  referring  to  banking,  insurance,  and  trans- 
portation as  functions  of  specialized  middlemen?  "Wlien  we  receive 
a  bicycle  manufactured  in  a  distant  state  do  we  have  to  pay  these 
functional  middlemen  for  their  services?  Is  it  fair  that  we  should? 

21.  Explain  how  a  partnership  increases  the  amount  of  money 
available  for  a  business  undertaking.  Are  business  partnerships  com- 
mon in  your  town?     Do  you  know  of  any? 

22.  In  what  way  would  an  association  lessen  the  risk  which  an  in- 
dividual took  in  a  business  enterprise? 

23.  How  do  you  account  for  the  fact  —  recall  your  study  of  medieval 
commerce  —  that  Italy  was  the  "cradle  of  commercial  arithmetic"? 

24.  "A  spirit  of  reckless  adventure  and  one  of  careful  and  laborious 
calculation  were  necessary  to  the  new  type  of  business  enterprise  which 
was  developing  in  the  period  we  are  studying."  In  what  ways  was 
there  more  adventure  in  business  in  this  new  period  than  during  the 
medieval  period? 

25.  Why  is  careful  calculation  necessary  to  business  success? 
What  agencies  help  business  men  to  make  their  calculations? 


ORGANIZATION    OF  TRADE  AND   COMMERCE       105 

26.  "The  regulated  company  was  used  for  colonization  as  well  as 
for  trading."  Name  two  such  companies  connected  with  American 
colonization.     Refer  to  an  American  History  if  necessary. 

27.  Review  the  material  on  the  merchant  adventurers  and  tell 
why  it  was  to  be  expected  tliat  England's  foreign  trade  should  be  largely 
in  the  hands  of  great  companies  during  the  period  of  its  development. 

28.  Consult  an  encyclopedia  and  report  on  the  powers  and  ac- 
tivities of  the  West  India  Company  or  some  of  the  other  English  com- 
panies. In  what  ways  would  these  companies  increase  the  power  of 
the  nation? 

29.  Why  were  great  monopolistic  companies  not  necessary  for  Eng- 
lish trade  with  France,  Spain,  and  Portugal? 

30.  What  is  your  understanding  of  the  term  "the  gain  spirit"? 
Why  did  it  not  develop  as  rapidly  during  medieval  times  as  later? 
Do  you  think  it  exists  to-day? 

31.  "The  new  specialists  —  the  functional  middlemen  —  came  as  a 
result  of  the  new  gain  spirit  and  the  new  opportunities  for  profit  which 
existed."     Can  you  show  that  this  statement  contains  truth? 

32.  What  reasons  can  you  give  for  the  fact  that  specialized  func- 
tional middlemen  did  not  come  into  existence  in  early  medieval  times  ? 

33.  "The  first  essentials  of  commerce  are  personal  freedom  and  the 
security  of  property."  Does  this  seem  to  you  a  true  statement? 
Were  these  elements  present  in  England  in  1300?     In  1700? 

34.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  144  to  152,  Selec- 
tions 76-81. 

Cheyney,  Industrial  and  Social  History  of  England :  Ch.  7. 


STUDY  VIII 

THE  INDUSTRIAL  REVOLUTION:    THE  RISE  OF 
MACHINE  INDUSTRY 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  how  power-driven  machinery  came  into  use  in  manufacturing 

and  trade. 

2.  To  study  some  of  the  far-reaching  effects  of  the  incoming  of  ma- 

chinery. 

The  extent  of  the  earher  changes  must  not  be  exaggerated. 

—  In  the  preceding  lessons  our  attention  has  been  centered  on 
changes  which  had  been  occurring.  These  changes  were  un- 
doubtedly important,  but  we  must  not  overestimate  them. 
They  merely  prepared  the  way  for  much  greater  changes  ;  they 
were  significant  as  forerunners,  as  successful  experiments, 
rather  than  as  complete  accomplishments. 

The  new  methods  and  organization  schemes  in  agriculture,  in 
manufacture,  and  in  commerce  were  far  from  fully  occupying  the 
field  in  1750.  Agriculture  was  still  carried  on  mainly  with 
primitive  tools  and  by  customary  methods.  For  example, 
rotation  of  crops  and  the  use  of  turnips  and  artificial  grasses 
had  been  practiced  only  by  the  more  advanced  cultivators. 
Perhaps  half  of  the  cultivated  land  of  England  was  still  managed 
by  the  open  field  strip  system,  although,  of  course,  the  old 
feudal  classes  had  long  since  disappeared. 

A  similar  situation  existed  in  manufacture.  No  matter 
what  industry  of  1750  we  might  study,  we  should  find  that  the 
tools  and  processes  were,  compared  to  the  ones  with  which  we 
are  familiar,  very  simple  and  inexpensive.     Iron  was  melted 

100 


THE    INDUSTRIAL   REVOLUTION 


107 


in  small  furnaces  which  were  heated  only  by  burning  charcoal. 
The  draft  of  air,  needed  in  smelting  to  intensify  the  process 
of  combustion,  was  furnished  by  a  large  hand-made  bellows 
operated  by  men  or  by  oxen.  Nails  w^re  made  from  iron 
rods  which  had  been  forged  in  small  blacksmith  shops.  They 
were  hammered  out  by  hand  on  anvils  and  cut  to  proper  length 
with  chisels.  Soap  was  produced  by  boiUng  wood  ash  in  small 
kettles,  together  with  sheep's  tallow 
or  other  fat.  Wood  was  used  as  a 
fuel  for  this  process  and  the  ele- 
ments were  stirred  and  mixed  with 
a  hand  ladle. 

Commerce,  too,  great  as  its  prog- 
ress had  been  compared  with  that 
of  the  time  of  the  manor,  was  primi- 
tive compared  with  modern  trade. 
Intercourse  between  distant  points, 
either  by  land  or  by  sea,  was  still 
difficult.  On  land  the  roads  were 
very  bad  ;  on  sea  one  had  to  rely  on 
slow,  small  saihng  vessels.  The 
organization  of  commerce  which  we 
have  seen  growing  up  did  not  fully 
occupy  the  field.  Many  non-special- 
ized, non-functionafizcd  merchants 
were  still  able  to  hold  their  own. 

But  if  industry  and  trade  in  out- 
ward appearance   still   bore    largely 
their  medieval  aspects,  a  tremendous  difference  was  soon  to 
be  brought  about. 

Conditions  ready  for  a  revolutionary  change.  —  It  is  fre- 
quently the  case  in  human  history  that  long  periods  of  slow 
preparation  set  the  stage  foi-  a  most  dramatic  change.  Since 
1750  such  a  dramatic  change  has  occurred.  Various  factors 
combined  to  make  possible  such  a  rapid,  tremendous,  and 
far-reaching  change,  that  we  speak  of  it  to-day  as  the  In- 


From  Chapln's  Social  Economy,  Cen- 
tury Co..  by  permission  of  author 
and  publishers. 

Medieval  Blast  Furnace 

Notice    the    bellows    and    the 
small  size  of  the  plant- 


108 


OUR   ECONOMIC   ORGANIZATION 


dustrial  Revolution.  Power-driven  machinery,  operated  in 
great  factories,  became  the  method  used  to  produce  many  of 
our  want-gratifying  goods.  The  significance  of  this  fact  is 
so  great  that  we  shall  spend  the  rest  of  this  book  in  attempting 
to  understand  it.  Meanwhile,  all  of  us  know  about  the  factory 
system  and  machinery  in  general  terms  and  are  accordingly 
able   to   assume   its   presence   while   we   look   at   the  factors 


Modern  Blast  Furnace 

Such  a  plant  as  this  puts  to  practical  use  the  contributions  of  chemistry  and 
physics-  Compare  with  the  illustration  of  a  medieval  blast  furnace  on  the  pro- 
ceding  page- 


which  history  had  brought  together  in  1750  and  which  made  it 
possible  for  these  new  methods  of  making  goods  to  come  into 
use  with  such  revolutionary  quickness. 

Our  previous  study  enables  us  to  state  these  factors  briefly. 
To  begin  with,  great  events  had  led  to  a  world  market  for 
goods  made  in  England.  The  simple  processes  and  the  small 
shops  of  English  manufacturers  could  not  ])roduce  goods  fast 
enough  to  satisfy  the  demand.     Masters  and  their  journeymen 


THE    INDUSTRIAL   REVOLUTION  109 

worked  early  and  late  ;  the  merchants  who  sold  the  wares  abroad 
tried  man}^  schemes  to  make  production  more  rapid ;  scientific 
societies  offered  prizes  for  the  invention  of  better  tools,  but  in 
spite  of  these  efforts  the  production  of  goods  in  the  small  work- 
shops lagged  behind  the  demand  in  the  markets. 

If  the  expanded  market  called  for  increased  productivity  in 
English  shops,  the  students  who  had  been  working  in  advanced 
mathematics,  and  the  scientists  who  had  been  experimenting 
in  physics,  chemistry,  and  other  natural  sciences  had  found  prin- 
ciples and  made  discoveries  that  could  be  used  in  practical  ways 
for  producing  goods.  More  and  more  the  discoveries  of  the 
student  were  applied  in  shops  and  factories.  Perhaps  few 
living  in  that  day  realized  the  significance  of  science  to  pro- 
duction, but  to  us  mechanical  engineering,  chemical  engineering, 
metallurgy,  and  ceramics,  some  of  the  new  forms  of  knowledge 
coming  from  scientific  study,  are  familiar  terms.  Science 
was  beginning  by  1750  to  aid  man  in  his  process  of  active 
adaptation. 

Looking  back,  we  realize  that  large  investments  would  be 
required  to  conduct  industry  on  a  factory  basis.  For  this,  too, 
past  events  had  provided.  The  profits  from  wool  growing, 
from  foreign  trade,  from  the  shipping  industry,  and  from  various 
other  expanding  businesses,  had  developed  considerable  funds. 
These  funds  were  in  the  hands  of  "  business  men."  They  were 
not  owned  by  medieval  kings  or  ecclesiastics  who  would  expend 
them  in  better  living,  in  war,  or  in  the  construction  of  cathedrals. 
These  funds  were  owned  b}^  business  men  and  would  be  made 
available  only  for  profitable  investment.  Their  owners  were , 
eagerly  seeking  it.  Furthermore,  financial  institutions  (bariks) 
had  come  into  existence  as  aids  to  the  business  man. 

We  see,  too,  as  we  look  back,  that  the  changes  which  had 
occurred  in  the  organization  of  commerce  and  manufacture 
had  provided  mechanisms  and  devices  for  conducting  operations 
on  a  larger  scale.  The  functionalized  middleman,  the  specialist 
in  various  lines,  the  partnership,  the  joint  stock  company  — 
these  and  many  others  had  been  tried,  had  proved  their  worth, 


110  OUR   ECONOMIC   ORGANIZATION 

and  had  demonstrated  their  apphcabihty  in  a  larger  field.  In 
this  connection  we  must  not  forget  the  various  communicating 
and  computing  aids  which  had  been  made  available. 

In  England,  the  political  situation  was  a  favorable  one. 
England  was  the  acknowledged  leader  among  commercial 
nations  and  her  government  was  such  as  to  leave  the  individual 
a  relatively  free  hand  in  industrial  enterprise.  The  decline  of 
the  gilds  meant  the  shaking  off  of  hampering  local  restrictions. 
As  we  shall  see  later,  there  were  few  national  restrictions  which 
were  really  embarrassing. 

And  Englishmen's  minds  were  prepared  for  the  new  regime. 
The  grip  of  medieval  custom  had  been  loosened.  Because 
things  had  always  been  done  in  a  certain  way  was  no  longer 
a  good  reason  for  continuing  thus  to  do  them.  Imagination, 
experimentation,  and  reason  came  to  the  front,  and  this  new 
rationality  accepted  the  gain  spirit  as  its  guide. 

A  revolution  in  agriculture.  —  The  change  was  revolutionary 
in  agriculture,  in  manufacturing,  and  in  trade.  In  agriculture 
the  period  of  introduction  of  new  methods  and  experimentation, 
which  we  have  described  earlier  (see  p.  76)  was  followed  after 
1750  by  a  period  of  widespread  application. 

"The  raising  of  turnips  and  other  root  crops  spread  from  experi- 
mental to  ordinary  farms  so  that  a  fallow  year  with  no  crop  at  all  in 
the  ground  came  to  be  almost  unknown.  Clover  and  artificial  grasses 
for  hay  came  to  be  raised  generally,  so  that  the  supply  of  cattle  forage 
for  the  winter  was  abundant.  New  breeds  of  sheep  and  cattle  were 
obtained  bj'^  careful  crossing  and  plentiful  feeding,  so  that  the  average 
.size  was  almost  doubled,  while  the  meat,  and  in  some  cases  the  wool, 
was  improved  in  quality  in  even  greater  proportion.  .  .  .  The  general 
improvement  in  agricultural  methods  was  due,  not  so  much  to  new 
discoveries  or  inventions,  as  it  was  to  the  large  amount  of  capital  which 
was  introduced  into  their  practice.  Expensive  schemes  of  draining, 
marling,  and  other  forms  of  fertilizing  were  carried  out,  long  and  careful 
investigations  were  entered  upon,  and  managers  of  large  farms  were 
trained  in  special  processes  by  landlords  and  farmers  who  liad  the  com- 
mand of  large  sums  of  money."  ' 

'  Cheyney,  Industrial  and  Social  History  of  England,  pp.  216-217. 


THE   INDUSTRIAL  REVOLUTION  111 

When  we  see  what  happened  in  manufacturing,  we  shall 
understand  how  the  revolution  in  agriculture  contributed  to 
that  in  manufacturing  by  making  it  possible  to  feed  masses  of 
factory  workers  in  factory  towns. 

It  is  almost  unnecessary  to  point  out  that  the  old  open 
field  system  did  not  lend  itself  to  these  new  agricultural 
methods.  As  a  consequence,  inclosures  were  again  stimulated 
(1760-1820)  —  this  time  not  only  for  sheep  raising  but  also 
for  the  promotion  of  tillage.  Naturally,  the  methods  used  in 
separating  tenants  from  their  holdings  were  different  from  those 
of  the  earlier  inclosures,  but  the  consequences  to  the  tenants 
were  not  greatly  different.  Even  though  their  rights  were 
purchased,  their  lack  of  training  in  financial  matters  and  their 
inability  to  compete  with  the  large-scale  scientific  farmers 
quickly  resulted  in  their  losing  control  of  the  land.  Large 
farms  took  the  place  of  small  ones  and  the  small  tenants  had 
no  choice  but  to  become  farm  laborers  or  to  join  the  constantly 
growing  propertyless  classes  of  the  factory  towns  and  thus 
contribute  to  the  labor  supply  so  needed  by  the  factory  system. 
Few  small  tenant  farmers  were  left.  The  leading  agricultural 
classes  became  landlords,  large  tenant  farmers,  and  agricultural 
laborers. 

A  change  in  manufacturing  methods.  —  The  story  of  what 
happened  in  manufacture  can  best  be  told  by  describing  the 
changes  in  the  manufacture  of  cotton  cloth,  bearing  in  mind 
always  that  corresponding  changes  were  taking  place  in  other 
lines  of  manufacture.  Interestingly  enough,  the  pressure  of  the 
world  market  upon  production  in  England  is  paralleled  in 
cotton  cloth-making  by  the  pressure  of  one  process  upon 
another. 

The  raw  material  used  in  making  cotton  cloth  was,  of  course, 
cotton  almost  as  it  came  from  the  cotton  plant.  Only  the  seeds 
had  been  removed.  When  it  reached  the  manufacturers  it  was 
merely  a  tangled  mass  of  cotton  fibers.  The  first  step  was  to 
straighten  out  these  fibers  so  that  they  lay  parallel.  This  was 
accomplished   by   "  carding "   or  brushing   and   combing   the 


112  OUR  ECONOMIC   ORGANIZATION 

fibers  with  stiff  brushes  called  cards.     These  implements  were 
operated  by  hand. 

The  next  step  was  spinning.  This  was  done  by  drawing  out 
these  parallel  fibers  into  a  loose  slender  string  which  was  at  the 
same  time  twisted  so  that  the  fibers  adhered  to  one  another  and 
a  cord  or  thread  was  formed.  The  spinning  was  carried  on 
with  simple  hand  or  foot-power  spinning  wheels,  in  the  operation 
of  which  the  fibers  were  drawn  out  by  hand  and  simultaneously 
twisted  by  a  whirling  device  called  a  flyer.  When  the  fibers 
had  been  thus  spun  into  thread  the  process  of  weaving  remained. 
This  work  was  performed  on  hand  looms.  The  "  warp  "  threads 
were  first  stretched  across  a  wooden  frame  and  by  means  of  a 
large  wooden  needle,  which  was  called  a  shuttle,  the  "  woof  " 
threads  were  woven  horizontall}^  across  them.  After  the  cloth 
was  woven  it  was  often  bleached  by  a  slow  process,  and  if  a 
figured  cloth  like  calico  was  desired,  the  color  was  stamped  on 
with  hand  dyes. 

All  of  this  work  was  slow  and  tedious,  but  spinning  was  slowest 
of  all.  The  rapid  weaver  could  use  the  yarn  or  thread  furnished 
by  six  spinners.  In  1738  an  invention  called  the  flying  shuttle 
increased  the  speed  with  which  weavers  could  work  and  made 
men  who  were  interested  in  cloth  manufacturing  more  anxious 
than  before  to  improve  the  methods  of  spinning.  The  improved 
weaving  process  thus  put  pressure  for  improvement  upon 
spinning. 

In  1764  one  of  the  small  manufacturers  of  England,  James 
Hargreaves,  a  master  weaver,  made  a  great  invention.  He  de- 
vised and  constructed  a  machine  with  which  one  man  could 
spin  eight  threads  at  the  same  time.  In  honor  of  his  wife, 
Hargreaves  called  this  machine  the  spinning-jenny.  Other 
workmen  soon  made  such  improvements  that  jennies  spinning 
thirty  threads  at  a  time  came  into  use.  Only  five  years  later, 
in  1769,  Richard  Arkwright  took  out  his  first  patent  for  a  spin- 
ning machine  which  would  not  only  make  a  number  of  threads 
at  the  same  time  but  would  spin  them  much  more  rapidly  than 
even  the  spinning  jenny.     Arkwriglit's  machines  had  been  in 


THE    INDUSTRIAL    REVOLUTION  113 

use  only  a  few  years  when  Samuel  Crompton,  another  weaver, 
combined  their  good  qualities  with  those  of  the  spinning  jenny 
and  created,  in  1779,  the  machine  called  the  spinning  mule.  It 
spun  a  finer  cotton  thread  than  could  be  spun  by  the  old 
spinning  wheel  and  made  possible  the  manufacture  of  muslin 
cloth. 

These  great  advances  in  spinning  methods  stimulated  inven- 
tion in  other  parts  of  the  cloth-manufacturing  process.  A  ma- 
chine for  carding  now  came  into  use,  a  "  printing  cylinder  " 
was  invented  with  which  calico  could  be  stamped  a  hundred 
times  faster  than  before,  and  the  use  of  chemicals  replaced  the 
old  methods  of  dyeing  cloth.  Naturally  a  great  deal  of  effort 
was  spent  to  improve  the  practice  of  weaving.  The  industry 
did  not  wait  long  for  an  improvement  in  this  work.  In  1787, 
a  loom  was  patented  which  could  be  operated  by  water  power 
or  steam,  and  which  could  weave  cloth  at  a  speed  unthought  of 
before  that  time.  The  process  under  pressure  now  became  the 
Applying  of  the  raw  cotton. 

The  power  loom  had  hardly  been  perfected  when  in  1792,  Eli 
Whitney,  an  American,  invented  the  cotton  gin.  When  cotton 
is  picked  from  the  plant  the  seeds  adhere  to  the  fiber.  Before 
the  invention  of  the  gin,  one  man  working  with  hand  tools 
could  remove  the  seeds  from  four  or  five  pounds  of  cotton  a  day. 
With  the  new  machine  one  man  could,  in  a  day,  clean  a  thousand 
pounds  of  cotton.  This  invention  made  it  certain  that  the 
new  machinery  of  the  cloth  mamifacturers  would  be  supplied 
with  raw  material. 

These  sudden  inventions  were  paralleled  by  others.  —  If 
we  notice  the  dates  at  which  these  new  machines  appeared,  we 
can  see  how  suddenly  the  great  changes  came  in  the  methods 
of  making  cloth.  But  these  were  not  the  only  changCvS  that 
were  made  in  this  time  of  industrial  revolution.  For  years 
scientists  and  inventors  had  been  experimenting  in  other  matters, 
many  of  which  came  to  have  a  close  relation  to  cloth  making. 
Their  experiments  with  steam  were  so  successful  that  in  1781 
the  manufacture  of  steam  engines  was  begun.     Very  rapidly 


114 


OUR  ECONOMIC   ORGANIZATION 


steam  engines  were  put  at  work  driving  the  new  cloth-making 
machinery. 

These  changes  in  the  methods  of  manufacture  would  have 
come  far  less  rapidly  had  it  not  been  for  a  greatly  increased 
ability  to  secure  coal.     Coal  miners  in  England   had  been  se- 


^^KJC  rc?>il~L_ 


Whitney's  Cotton  Gin 


The  cotton  was  separated  from  the  seeds  in  the  little  hand  mill  being  turned 

by  the  wife- 


riously  hampered  by  water  in  the  mines  and  had  been  working 
for  a  long  time  to  improve  the  method  of  pumping.  The  first 
practical  use  to  which  the  steam  engine  was  put  was  in  this 
work  of  pumping  out  mines  and  this  led  to  a  great  increase  in 
the  output  of  coal.  The  safety  lamp,  invented  by  Sir  Humphry 
Davy  in  1815,  further  increased  production.  These  and  other 
improvements  in  mining  methods  made  certain  the  fuel  supply 
necessary  for  creating  steam  power. 


THE   INDUSTRIAL   REVOLUTION  115 

The  implements  of  the  old  domestic  manufacturers  were  very 
largely  made  of  wood,  but  stronger  material  had  to  be  used 
when  the  power-drive  came  into  use.  The  steam  engine  it- 
self must  also,  of  course,  be  made  of  metal  and  these  conditions 
increased  the  demand  for  iron  and  (later)  steel  production.  To 
smelt  iron  in  the  old-fashioned  small  furnace  heated  with  char- 
coal demanded  a  supply  of  wood.  But  the  amount  of  wood 
available  in  England  for  charcoal  had  been  almost  exhausted 
and  the  iron  industry  would  have  been  in  a  sad  plight  were  it 
not  for  the  fact  that  during  this  same  period  of  change  there 
also  was  put  into  operation  a  furnace  which  could  burn  coal  as  a 
fuel  for  smelting  iron.  This  furnace  was  patented  by  Roebuck 
in  1762.  It  was  such  an  improvement  over  the  old  charcoal 
furnaces  that  the  production  of  iron  increased  by  thousands 
of  tons  per  year.  Iron  became  cheaper  and  more  plentiful  and 
replaced  wood  in  many  machines. 

The  factory  system.  —  But  these  new  inventions  and  new 
methods  brought  other  changes.  The  new  machinery  required 
a  location  where  water  power  was  available  or  to  which  coal 
could  be  readily  transported;  also,  this  new  machinery,  built 
of  iron,  and  large  enough  to  demand  a  power  drive,  was  far 
too  expensive  for  the  domestic  artisans  to  buy  for  their  own  use 
and  was  altogether  too  large  to  be  employed  in  their  homes  and 
little  workshops.  Men  who  had  made  money,  either  as  or- 
ganizers of  the  clothier  type  or  in  commerce,  were  the  persons 
who,  either  alone,  or  in  partnerships,  or  in  joint  stock  companies, 
or  in  corporations,  were  able  to  purchase  the  new  machines 
and  construct  the  factories.  Into  these  factories,  under  one 
roof,  with  regular  hours  of  work  determined  by  their  employers, 
the  dispossessed  tenants  from  the  agricultural  districts,  the 
poorer  artisans  of  the  towns,  and  often  the  women  and  children 
of  their  families  were  collected  to  become  "factory  hands" 
or  "mill  workers."  This  was  the  beginning  of  factories  and 
factory  production  of  goods  as  we  use  those  terms  to-day. 

What  took  place  in  cotton-cloth  manufacturing  is  only  an 
illustration  of  the  changes  that  occurred  in  other  industries. 


110  OUR  ECONOMIC   ORGANIZATION 

The  kettle  of  the  country  soap  boiler  gave  way  to  a  long  chemi- 
cal process ;  the  anvil  and  chisel  of  the  nail  maker  were  replaced 
by  "  steel  mills  "  ;  the  village  potter  found  that  the  machinery 
of  the  "  potteries  "  or  pottery  factories  made  his  hand  tools 
useless.  In  almost  ev^ry  industry  and  trade,  machinery  took 
the  place  of  tools.  This  machinery  was  bought  and  set  up  in 
factories  by  capitalists  and  the  old  artisans  and  their  helpers 
had  little  choice  but  to  become  the  employees  of  the  men  who 
owned  it.  The  machine  has  "  harnessed  the  forces  of  nature 
for  the  use  of  man,"  as  for  example  by  harnessing  the  expansive 
power  of  steam,  and  has  made  possible,  thereby,  a  great  in- 
crease in  production. 

Machine  industry  and  the  growing  market.  —  When  one 
reflects  on  the  great  increase  in  productive  capacity  brought 
about  by  machine  industry  and  the  factory  system,  it  seems 
as  though  the  market  would  certainly  have  been  sated.  It  so 
happens,  however,  that  for  the  period  of  a  century,  great  as 
was  the  expansion  of  productive  capacity,  the  expansion  of  the 
market  was  even  greater. 

It  is  interesting  that  this  expansion  of  the  market  was  largely 
due  to  the  introduction  of  machinery  and  scientific  methods  into 
transportation  and  communication.  This  movement  began 
with  road  building.  Parliament  passing  more  than  fom'  hun- 
dred and  fifty  acts  for  road  improvement  between  1760  and 
1774,  including  a  law  which  organized  and  systematized  the 
road  building  of  the  whole  nation.  The  great  road  builders 
of  that  day,  such  as  Telford  and  Macadam  (note  the  macadam 
road  of  to-day),  wrought  as  much  change  in  road  building  as 
did  the  inventors  in  manufacturing.  England  also  made  great 
improvements  in  this  period  in  internal  water  transportation. 
She  improved  and  widened  her  navigable  rivers,  and  then  con- 
nected and  extended  them  by  canals.  Eventually  these  water- 
ways provided  a  fairly  complete  system  of  cheap  transporta- 
tion for  goods. 

The  road  building  and  canal  period  was  followed  by  the  appli- 
cation of  steam  to  transportation  and  science  to  communication. 


THE    INDUSTRIAL   REVOLUTION 


117 


In  water  transportation,  an  American  inventor,  Robert  Fulton, 
led  the  way  by  inventing  the  steamboat  in  1807.  This  was 
followed  in  1819  by  the  first  transatlantic  steam  voyage.  From 
that  time  certainty,  regularity,  safety,  and  large-scale  operations 
began  to  characterize  ocean  transport.  In  land  transportation, 
the  year  1825  marks  the  building  of  the  first  successful  locomo- 
tive, and  the  beginning  of  the  development  of  the  railway  net, 
not  only  of  England  but  of  the  entire  world.  Relatively  soon, 
also,  came  the  telegraph,  the  ocean  cable,  the  telephone,  and 


CouTtesy  New  Yort  Central  Railroad 

DeWitt  Clinton  Compared  with  Modern  Locomotive 

In  the  pygmy  DeWitt  Clinton,  one  of  the  earliest  American  locomotives, 
water  was  supplied  from  the  barrels  shown  in  the  picture-  Sparks  rained  on 
the  passengers- 

the  wireless  —  later  manifestations  of   science  and    machine 
industry. 

These  improvements  in  transportation  and  communication 
paralleled  and,  indeed,  were  largely  responsible  for  a  very  real 
"  opening  of  the  world  for  the  use  of  man."  The  earlier  period 
of  colonization  had,  after  all,  merely  touched  the  circumference 
of  the  new  lands.  It  was  the  nineteenth  century  which  witnessed 
the  settlement  and  development  of  our  great  middle  west,  the 
largest  market  for  manufactured  goods  that  the  world  has  ever 
seen.  It  witnessed  also  the  development  of  South  America, 
Australia,  Africa,  China,  and  Japan.  These  facts  make  it  easy 
to  understand  why  the  nineteenth  century  also  saw  the  greatest 
increase  of  population  the  world  has  known,  —  a  population 


118  OUR  ECONOMIC   ORGANIZATION 

with  an  alert,  intellectual  outlook,  rapidly  expanding  wants, 
and  ability  to  pay  for  goods  with  which  to  gratify  them. 

The  second  phase  of  the  Industrial  Revolution.  —  With  such 
a  rapidly  expanding  market  for  manufactured  articles,  it  is 
not  surprising  that  the  demand  for  ever-increasing  manufac- 
turing power  continued.  Partly  because  of  her  advantage  of  an 
early  start,  partly  because  of  her  geographical  position,  partly 
because  of  her  favorable  economic  and  political  organization, 
partly  because  of  a  certain  bent  of  mind  of  her  people,  England 
took  the  lead  in  developing  the  "  capitalistic  "  method  of  pro- 
duction. This  lead  was  soon  followed  by  others.  America, 
Germany,  France,  Italy,  Austria,  Japan,  and  others  now  make 
goods  of  all  sorts  in  factories  by  machine  methods. 

A  turning  point  was,  however,  finally  reached.  By  the  last 
quarter  of  the  nineteenth  century,  there  had  come  a  checking 
of  the  rate  of  increase  of  the  world's  population  and  an  approach 
to  the  completion  of  the  opening  of  new  territories.  By  that 
time,  also,  thanks  to  our  schools  of  technology,  —  our  engineer- 
ing schools,  —  and  the  other  organized  agencies  for  appljdng 
science  to  manufacture,  the  productive  capacity  of  the  world  was 
tremendous.  Under  these  circumstances  manufacture  began  to 
outrun  the  market.  This  is  sometimes  called  the  second  phase 
of  the  Industrial  Revolution.  It  is  marked  by  efforts  at  market 
extension  comparable  to  the  earlier  efforts  for  increased  produc- 
tion. Men  are  constantly  studying  new  ways  of  selling  goods ; 
wares  are  advertised  more  widely ;  salesmen  are  trained  to 
become  more  skillful ;  articles  are  made  more  attractive ;  and 
the  "  capitalistic  "  nations  of  the  world  have  become  interested 
in  further  development  of  colonies  and  in  the  establishment  of 
favorable  trade  relations. 

A  comparison  of  manufacture  under  the  domestic  system 
and  modem  capitalism.  —  The  series  of  changes  which  we  have 
been  studying  in  this  lesson,  coupled  with  those  which  were 
described  in  the  break-up  of  the  medieval  system,  are  often 
spoken  of  as  the  "  incoming  of  capitalism."  Capitalism  is  one 
name  applied  to  our  modern  economic  organization,  probably 


THE    INDUSTRIAL   REVOLUTION 


119 


because  capital  goods,  such  as  machines,  play  so  important 
a  part  in  it.  The  following  comparison  of  manufacture  under 
capitalism  and  under  the  domestic  system  shows  that  the  use 
of  capital  goods  is  only  one  of  many  phases  of  capitalism.  It 
hints  also  at  the  origin  of  many  of  the  "  problems  "  of  our  present 
economic  organization. 


Under  modern  capitalism 

Large-scale  production. 

Machine  industry ;  technology 
present  in  many  ways. 

Processes  of  manufacturing  an  ar- 
ticle many  and  complex. 

Work  done  in  factories  by  large 
groups  of  workers. 

Hours,  conditions,  and  place  of 
work  controlled  by  manager. 
At  most,  workers  can  bargain 
with  him  on  these  matters. 

Workers  divorced  from  ownership 
of  tools. 

Worker  highly  specialized,  per- 
forms one  small  operation  over 
and  over. 

Wage  system,  with  wage  often 
determined  by  world  competi- 
tion. 

Gain  spirit  more  intense ;  market 
is  world-wide. 

Relations  impersonal;  manufac- 
turer knows  little  of  his  em- 
ployees. 

Standardized,  mass  production  ac- 
cording to  design. 

Changes  in  governmental  control  of  business.  —  The  changes 
which  we  have  been  describing  in  this  lesson  and  in  the  preceding 


Under  the  domestic  system 

Small-scale  industry. 

Mostly  tool  industry;  small 
amount  of  machinery. 

Processes  of  manufacturing  an  ar- 
ticle few  and  simple. 

Work  done  in  small  shops  and  gen- 
erally in  the  home  by  single 
worker  or  by  very  small  groups. 

Workers  controlled  hours,  condi- 
tions, and  place  of  work. 


Workers  generally  owned  own 
tools. 

Worker  carried  on  fairly  large 
number  of  operations,  though 
not  always  as  wide  as  under 
gild  system. 

Wage  system,  with  wages  deter- 
mined merely  by  local  condi- 
tions. 

Production  for  gain;  for  fairly 
^ide  market. 

Relations  between  middlemen 
{e.g.  clothier)  and  workers  per- 
sonal. 

Individuality  in  production  still 
present. 


120  OUR   ECONOMIC   ORGANIZATION 

lessons  were  accompanied  by  changes  in  the  relation  of  govern- 
ment to  business  activity.  Under  the  handicraft  system,  con- 
trol and  supervision  of  industry  were  mainly  local,  mainly  gild 
control.  As  the  domestic  system  crept  in,  the  gilds  lost  their 
hold ;  and  as  the  gild  systera  weakened,  the  grip  of  the  national 
government  grew  stronger.  Gradually  the  national  govern- 
ment came  to  regulate  the  major  part  of  the  business  affairs 
of  the  nation,  doing  so  in  the  interests  of  the  development  of 
national  strength.  For  example,  certain  industries,  such  as 
farming,  were  encouraged  in  order  that  the  nation  might  be 
self-sufficing  in  time  of  war;  certain  trade  regulations  were 
passed  in  the  hope  of  weakening  other  nations. 

This  movement,  which  was  at  its  height  from  1500  to  1750, 
has  been  called  mercantilism.  The  detail  into  which  the  regu- 
lations went  seem  quite  surprising  to  us  to-day.  Rules  were 
passed  concerning  the  making  of  cloth,  the  pouring  of  candles, 
the  manufacture  of  barrels,  the  preparation  of  leather,  the  mak- 
ing of  pins. 

"In  every  quarter  and  at  every  moment,  the  hand  of  govern- 
ment was  felt.  Duties  on  importation,  and  duties  on  exportation ; 
bounties  to  raise  up  a  losing  trade,  and  taxes  to  pull  down  a  remunera- 
tive one ;  this  branch  of  industry  was  forbidden,  and  that  branch  en- 
coiu^aged ;  one  article  of  commerce  must  not  be  grown  because  it  was 
grown  in  the  colonies,  another  might  be  grown  and  bought  but  not 
sold  again,  while  a  third  might  be  bought  and  sold  but  not  leave  the 
country.  Then,  too,  we  find  laws  to  regulate  wages;  laws  to  regulate 
prices  ;  laws  to  regulate  profits ;  laws  to  regulate  the  interest  on  money ; 
custom  house  arrangements  of  the  most  vexatious  kind."  ^ 

In  external  trade,  the  best  known  of  the  English  regulations 
were  the  Acts  of  Trade  and  Navigation.  These  acts  looked 
toward  limiting  in  the  colonies  the  growth  of  industries  which 
would  seriously  compete  with  English  manufactures  and  toward 
giving  English  vessels  a  monopoly  of  the  carrying  trade. 
Although  they  were  really  not  very  harmful  to  the  American 
colonies,  the  Acts  came  to  be  administered  in  an  irritating 

'  Adapted  from  H.  T.  Buckle,  History  of  Civilization  in  England,  I,  pp.  201-203. 


THE    INDUSTRIAL   REVOLUTION  121 

way  and  they  constituted  one  of  the  causes  of  the  American 
Revolution. 

Such  governmental  supervision  of  industry  was  accepted  as 
a  matter  of  course  during  the  rise  of  strong  central  governments. 
The  time  came,  however,  when  it  was  first  questioned,  and  then 
rejected.  It  will  help  us  to  understand  how  this  came  about 
if  we  bear  in  mind  that,  after  all,  the  strict  rules  and  regulations 
were  not  very  strictly  enforced  or  very  fully  obeyed.  The  scat- 
tered locations  of  the  domestic  system  of  manufacture  made  it 
difficult  for  the  central  government  to  carry  out  its  rules  and, 
in  foreign  trade,  smugglers  found  it  relatively  easy  to  evade 
the  English  navy.  Then,  too,  it  happened  that  some  of  the 
more  important  regulations  did  not  apply  to  new  industries, 
such  as  cotton  manufacture,  and  the  example  of  the  un- 
hampered growth  of  these  new  industries  furnished  a  powerful 
argument  against  the  system  of  restrictions. 

More  significant  still,  a  new  philosophical  point  of  view  came 
to  be  taken  (especially  by  a  group  of  French  writers)  in  the 
eighteenth  century.  It  can  best  be  described  as  a  searching  for 
greater  liberty,  "  a  revulsion  against  interference  with  personal 
freedom  of  action,  a  disinclination  to  be  controlled  any 
more  than  was  absolutely  necessary,  a  belief  that  men  had  a 
right  to  be  left  free  to  do  as  they  chose  so  far  as  freedom  was 
practicable."  ^ 

On  the  positive  side,  this  revulsion  against  interference  ap- 
peared as  a  belief  that  there  is  a  natural  order  and  "  natural 
laws  "  which  no  government  should  attempt  to  violate,  and  that 
in  this  natural  order  the  greatest  good  would  result  from  letting 
each  individual  follow  largely  his  own  self-interest.  The  signifi- 
cance of  this  new  point  of  view  is  shown  by  the  fact  that  our 
American  Revolution  and  the  French  Revolution  are  consider- 
ably indebted  to  it  for  their  ideas  and  ideals. 

In  its  application  to  the  business  world,  this  body  of  thought 
—  this  "individualism"  —  became  known  as  the  laissez  faire 
(meaning  "  let  alone  ")  theory.     The  idea  was,  of  course,  that 

*  Cheyney,  Industrial  and  Social  History  of  England,  p.  224. 


122  OUR  ECONOMIC  ORGANIZATION 

the  government  should  in  the  main  let  business  alone  and  should 
allow  business  men  to  carry  on  their  affairs  in  the  way  which 
seemed  to  them  best.  The  father  of  economics,  Adam  Smith, 
published  a  book  called  the  "  Wealth  of  Nations  "  in  1776,  which 
took  this  position  and  had  a  profound  influence  upon  the 
thought  of  Englishmen  and  of  other  peoples. 

The  laissez  faire  theory  was  a  comfortable  one  to  follow  dining 
a  period  of  such  rapid  change  as  was  ushered  in  by  the  Industrial 
Revolution.  The  new  "capitalists"  were  of  course  glad  to 
have  a  free  hand  in  dealing  with  the  new  conditions,  processes, 
and  methods.  As  for  the  rest  of  the  community,  it  was  more 
comfortable  to  "  let  alone  "  than  to  try  to  understand  and  control 
the  new  giant  forces.  Both  because  it  is  easier  to  drift  with 
the  tide,  and  because  of  the  new  philosophical  outlook  the 
old  scheme  of  governmental  control  gradually  gave  way.  Some 
of  the  regulations  were  quietly  disregarded  ;  others  were  removed 
from  the  statute  books.  By  the  end  of  the  first  quarter  of  the 
nineteenth  century  the  laissez  faire  regime  was  in  full  swing. 

While  the  complete  story  cannot  be  told  at  this  time,  it  must 
be  pointed  out  that  laissez  faire  was  followed  by  a  new  regime  of 
regulation.  Evils  attended  laissez  faire.  For  example,  the 
introduction  of  the  factory  system,  under  what  were  prac- 
tically laissez  faire  conditions,  meant  not  a  little  suffering  and 
exploitation  of  workers.  Hours  were  frightfully  long;  very 
young  children  were  used  under  quite  as  shocking  conditions 
as  obtained  among  slaves ;  workers  were  not  protected  from 
dangerous  machinery.  There  are  some  accounts  of  children 
working  at  the  age  of  five  or  six,  and  being  beaten,  too,  for 
work  poorly  done  or  for  lack  of  speed.  Indeed  orphans  were 
sometimes  hired  out  in  lots  to  unscrupulous  taskmasters,  who 
caused  them  to  work  and  to  live  under  conditions  which  seem  in- 
credible to  us  to-day.  For  these  and  for  other  reasons  there  arose, 
as  the  Industrial  Revolution  proceeded  on  its  course,  a  demand 
for  a  return  to  governmental  regulation.  This  demand  can  be 
best  understood  after  we  have  had  an  opportunity  to  take  a  more 
intimate  view  of  some  of  the  problems  which  had  to  be  met. 


THE    INDUSTRIAL   REVOLUTION 


123 


Stages  of  development  of  English  industry.  The  following 
diagram  will  help  us  to  see  the  stages  in  the  development  of 
our  economic  organization  from  medieval  times  to  the  present. 
We  must  keep  in  mind  at  least  two  points  in  studjdng  this  dia- 
gram. First,  no  accurate  date  can  be  given  when  one  stage 
succeeded  another.  The  date  differs  from  nation  to  nation 
and  from  industry  to  industry  because  of  varying  conditions. 
Second,  one  stage  did  not  cease  suddenly  as  another  began.  All 
the  earher  stages  have  tended  to  persist.  An  example  of  this 
is  the  presence  of  the  handicraft  tailor  in  clothes-making  to-day. 
The  diagram  is,  accordingly,  more  useful  as  a  means  of  summon- 
ing up  in  the  mind  the  material  of  the  preceding  chapters 
than  as  a  precise,  exact  statement  of  stages  of  development. 


Point  of  View  Taken 

The  Stages  of  Development 

System  of  produc- 
tion   

Household 

Handicraft    Domestic 

Factory 

Extent  of  market    . 
Method      of      ex- 

economy          economy       system 
Little  or  none  Local             Wide 

system 
Very  wide 

change  .... 
Relation  of  central 

Barter 

Money         Credit 

government      to 

industry     .     .     . 
Organization  in  the 
woolen  industry 

Little 
Household 

Mercan-        Laissez 
tilism             fairc 
Gild              Clothier 

Regulation 
Factory 

PROBLEMS 

1.  What  is  meant  by  saying  the  age  of  geographical  discovery 
paved  the  way  for  the  age  of  invention  ? 

2.  How  many  of  the  articles  in  your  home  are  made  in  factories? 
Do  you  know  whether  your  clothes  are  made  in  factories  ?  Your  shoes  ? 
Are  the  things  you  eat? 

3.  It  is  often  said  that  machine  industry,  requiring  large  expendi- 
tures of  money  for  building  and  equipping  factories,  could  not  exist 


124  OUR   ECONOMIC   ORGANIZATION 

until  financial  institutions  for  assembling  large  sums  of  money  had 
come  into  use.  Can  you  explain  why  this  statemient  might  be  true? 
What  financial  institutions  would  aid  in  assembling  the  money  nec- 
essary to  build  a  factory? 

4.  It  is  often  said  that  machine  industry  could  not  come  until  there 
existed  a  laboring  class  that  was  not  attached  to  land.  Whence  came 
the  land-free  class? 

5.  Try  to  write  in  a  sentence  the  meaning  of  the  term  "The  In- 
dustrial Revolution."  Wliat  it  meant  by  saying  that  the  Industrial 
Revolution  began  in  the  thirteenth  and  fourteenth  centuries? 

6.  Which  of  the  following  statements  seems  to  you  more  true? 
"The  Industrial  Revolution  was  the  work  of  a  mere  handful  of  men." 
"Had  Watt  and  Ai'kwright  lived  under  the  conditions  which  were  in 
vogue  in  preceding  centuries,  they  would  have  secured  little  distinc- 
tion." 

7.  "The  clothier  under  the  domestic  system  had  the  gain  spirit." 
Is  this  statement  true  or  do  you  tliink  the  gain  spirit  began  with  the 
Industrial  Revolution? 

8.  What  is  meant  by  saying  the  second  inclosure  movement  was 
the  beginning  of  capitaUstic  agriculture?  That  it  was  the  beginning 
of  scientific  farming  ? 

9.  The  second  inclosure  movement  forced  many  country  workers 
from  the  land.  Where  could  they  go?  Could  they  become  crafts- 
men? 

10.  In  what  ways  did  the  revolution  in  agriculture  contribute  to 
the  revolution  in  manufacture  ? 

11.  Could  we  have  had  a  factory  system  to-day  without  the  steam 
engine  or  some  equivalent  device?  Write  out  a  short  statement  on 
"What  the  steam  engine  has  meant  to  industry." 

12.  Machine  industry  could  not  reach  its  greatest  importance  until 
machines  were  used  to  make  machines.  Why  is  this  important  ?  Why 
did  they  not  use  macliiiics  to  make  machines  at  the  beginning  of  the 
Industrial  Revolution  ? 

13.  Why  is  tool  industry  not  as  productive  as  machine  industry? 

14.  It  is  often  said  that  machine  industry  could  not  come  until  there 
was  a  wide  market  for  goods.  Wliat  were  some  of  the  occurrences 
that  widened  the  market? 


THE    INDUSTRIAL   REVOLUTION  125 

15.  It  has  been  said  that  the  new  machinery  would  have  been  of 
little  importance  if  means  of  transportation  had  not  been  greatly  im- 
proved. Do  you  think  there  is  truth  in  this  statement?  Describe 
the  ways  in  which  transportation  was  improved. 

16.  "Macliine  industry  has  meant  as  much  for  trade  as  for  manu- 
facture."    Explain. 

17.  What  dates  should  you  set  as  marking  the  beginning  and  the 
end  of  the  Industrial  Revolution?     Is  it  over  yet? 

18.  It  costs  a  great  deal  to  build  a  factory  and  put  it  into  operation. 
Make  as  long  a  list  of  these  costs  as  you  can. 

19.  What  is  meant  by  saying  that  machine  industry  separated 
the  worker  from  knowledge  and  control  of  the  business?  Give 
some  instances  of  how  this  separation  might  occur.  Why  was  it 
more  difficult  for  a  man  w^ho  was  out  of  work  to  go  into  business 
for  liimseK  after  the  incoming  of  machine  industry  than  it  had  been 
before  ? 

20.  A  significant  fact  of  the  Industrial  Revolution  has  been  the 
taking  from  the  home  to  the  factory  of  many  things  formerly  produced 
in  the  home.     Wliat  has  this  meant  for  women? 

21.  "The  coming  in  of  machinery  made  a  great  demand  for  the 
labor  of  women  and  children,"     Why? 

22.  The  Industrial  Revolution  has  increased  impersonality.  What 
does  this  mean? 

23.  What  is  the  connection  between  the  existence  of  factories  and 
the  growth  of  cities  ? 

24.  Explain  why  the  domestic  manufacturers  could  not  meet  the 
competition  of  the  factory  system.  What  became  of  them  ?  Did  they 
go  into  agriculture? 

25.  "The  Industrial  Revolution  brought  about  a  loss  of  stability 
in  the  position  of  the  worker."     What  does  this  mean? 

26.  The  sj'stem  of  control  which  the  government  exercised  over 
industry  before  the  incoming  of  laissez  faire  is  usually  called  mer- 
cantilism. Look  up  this  word  in  an  encyclopedia.  Be  ready  to  ex- 
plain the  difference  between  this  and  laissez  faire. 

27.  Adam  Smith's  "Wealth  of  Nations"  and  the  Declaration  of 
Independence  were  both  declarations  of  a  new  attitude  of  freedom. 
One  was  economic,  one  was  political.     Explain  what  this  means. 


126  OUR  ECONOMIC   ORGANIZATION 

28.  Which  occurrence  of  the  year  1776  would  you  say  was  of  more 
importance,  the  Declaration  of  Independence  or  the  publication  of  the 
"  Wealth  of  Nations  "  ? 

29.  Was  the  Industrial  Revolution  purely  industrial  in  character? 
Is  one  justified  in  calling  it  a  revolution,  or  would  evolution  be  a  better 
term? 

30.  What  is  meant  by  saying  that  we  are  now  in  the  second  phase 
of  the  Industrial  Revolution? 

31.  Did  the  Industrial  Revolution  help  cause  the  rise  of  trade 
unions  ?    What  modern  problems  can  you  trace  back  to  it  ? 

32.  What  should  you  list  as  the  causes  of  the  Industrial  Revolution? 
What  should  you  list  as  its  achievements  ? 

33.  Make  an  outline  of  the  main  points  of  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  144-153,  Selections 
32-84. 

Cheyney,  Industrial  and  Social  History  of  England,  Chs.  8  and  9. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life: 

Series   A,  Lesson  A-8:    Lyon,   "The    Rise   of   the   Machine 

Industry." 
Series  B,   Lesson  B-2:  Tryon,  "The  Varied  Occupations  of  a 
Colonial  Farm." 
Lesson  B-3 :  Van  Hoesen,  "  A  Cotton  Factory  and 
the  Workers." 
Series  C,   Lesson  C-2:  Tryon,  "Spinning  and  Dyeing  Linen 
in  Colonial  Times." 
Lesson  C-29:  Lathrop,  "  Child  Labor." 


STUDY  IX 
THE  SPECIALIZATION  OF  BUSINESS  UNITS 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  that  production  is  carried  on  by  specialization. 

2.  To  study  the  specialization  of  distinct  economic  units. 

3.  To  see  how  this  specialization  is  organized. 

Specialization  is  fundamental  in  economic  organization.  — 

Repeatedly,  in  our  study  of  the  development  of  our  economic 
organization,  we  said  that  it  was  a  story  of  the  incoming  of 
specialists  who  cooperated.  We  have  seen  how  one  after  an- 
other of  these  new-comers  —  new  specialists  —  contributed 
something  that  helped  in  the  great  task  of  gratifying  wants. 
In  our  modern  system  of  want-gratification,  specialization  is 
one  of  the  most  important  methods  that  society  has  developed. 
Clay,  the  English  economist,  points  out  the  true  meaning  of 
specialization. 

"  Specialization,"  he  says,  "  is  fundamental  in  economic 
organization  because  it  is  the  means  by  which  man  increases 
the  return  to  a  given  amount  of  work."  This  is  the  nub  of  the 
whole  matter.  Man  in  his  active  adaptation  struggle  is  always 
eager  for  devices  which  will  increase  productivity,  and  prob- 
ably none  has  been  more  fruitful  than  speciahzation.  The 
full  analysis  of  its  advantages  (and  disadvantages)  is  post- 
poned to  Study  XII,  for  by  that  time  we  shall  have  a  knowledge 
of  its  many  forms  and  manifestations,  and  shall  be  in  a  position 
to  evaluate  its  contribution  to  our  welfare.  But  we  know  already 
the  prime  reasons  why  it  increases  productivity.  They  are 
well  stated  by  Clay :  "It  brings  about  this  result  in  two  ways ; 
by  subdivision  of  tasks  and  by  repetition  of  tasks.     Subdivision 

127 


128 


OUR  ECONOMIC   ORGANIZATION 


results  in   operations  easier   in  themselves,  repetition  enables 
operations  to  be  performed  with  gi-eater  ease." 

The  differentiation  or  specialization  of  productive  enter- 
prises. —  Historically  speaking,  one  of  the  earliest  forms  or 
manifestations  of  specialization  was  the  speciahzation  in  occupa- 
tions. Even  in  the  medieval  manor  where  nearly  every  one 
engaged  at  one  time  or  another  in  practically  all  of  the  manorial 
tasks,  there  was  some  specialization  of  this  kind.  There  was 
pretty  certain  to  be  a  priest  and  a  miller,  and  quite  likely  a 
blacksmith  or  a  carpenter.  With  the  rise  of  the  towns  there 
developed  cloth-makers,  barbers,  millers,  inn-keepers,  mer- 
chants, shipwrights,  pin-makers,  tanners,  and  coopers  —  to 
mention  only  a  few  of  them. 


Extractive  < 


Modern 
Industries 
and 
Services 


Primary  Industries 


Secondary  Industries 


Hunting 

P^ishing 

Grazing 

Lunabering 

Mining 


Genetic  < 


Agriculture 


Tillage 

Plant  Breeding 

Animal  Breeding 


Forestry 
Fish  Culture 
f  Manufacturing 


j  Transporting 


Storing 
[  Merchandizing 

Healing 


Personal  and  Professional  Services  * 


Teaching 
Inspiring 
Governing 
.  Amusing,  etc. 


As  time  went  on,  occupations  became  more  and  more  numer- 
ous, more  and  more  specialized.  With  the  coming  in  of  the 
factory  system  some  of  these  occupations  rose  to  the  position 
of  great  industries.  For  example,  the  medieval  shoemaker 
has  been  supplanted  by  the  modern  shoe-manufacturing  indus- 
try, the  medieval  cooper  by  the  great  cooperage  plants.  To-day 
we  see  our  social  resources,  land,  labor,  capital,  and  acquired 
knowledge,  divided  up  or  apportioned  among  great  industries,. 
which  are  so  numerous  that  a  mere  list  of  them  would  cover 


THE    SPECIALIZATION   OF   BUSINESS  UNITS        129 

page^.  It  would  be  tiresome  to  enumerate  them.  Instead, 
let  us  look  at  the  diagrammatic  classification  ^  of  the  speciahzed 
productive  enterprises  of  a  modern  community  on  the  preceding 
page.  It  could  be  subdivided  much  further,  but  as  it  stands  it 
is  very  useful  in  giving  us  a  bird's-eye  view  of  the  specialized 
enterprises  of  to-day. 

Specialization  of  economic  units  aids  production.  —  As 
every  one  knows,  there  are  special  business  units  that  carry  on 
each  of  the  industries  and  services  shown  in  this  chart.  There 
are  farms  and  ranches,  each  specialized  units  in  agriculture 
and  grazing.  There  are  mines,  saw-mills,  offices,  theaters, 
churches,  and  schools,  each  of  which  are  separate  units  specializ- 
ing in  various  activities. 

To  learn  more  fully  of  this  specialization  of  economic  units 
and  especially  to  see  the  importance  of  such  specialization  as 
a  "  means  by  which  man  increases  the  return  to  a  given  amount 
of  work  "  are  our  purposes  in  this  study. 

What  is  the  breakfast  egg  ?  —  A  useful  way  of  seeing  the 
advantage  of  specialization  of  economic  units  is  to  follow 
through  the  work  that  must  be  done  in  bringing  us  some  such 
product  of  daily  consumption  as  eggs.  We  shall  see  that  the 
egg  on  our  breakfast  table  is  the  result  of  the  specialized  serv- 
ices of  a  great  many  economic  units.  The  farmer  whose 
poultry  yard  has  furnished  him  with  eggs  could  sell  these  in  a 
number  of  ways.  He  might  send  them  directly  to  consumers 
in  the  cities,  but  ordinarily  he  does  not  know  just  who  wants 
eggs  at  any  particular  time  nor  does  he  know  how  many  could 
be  used  by  any  household  and  what  price  it  would  be  willing 
to  pay.  Before  he  could  sell  eggs  in  this  direct  "  producer  to 
consumer  "  fashion,  it  would  also  be  necessary  for  him  to  grade 
the  eggs  very  carefully  so  that  there  could  be  no  dissatisfaction 
on  the  part  of  the  purchasers,  to  pack  them  for  shipment,  and  to 
arrange  for  the  collection  of  money  due  him.  Instead  of  selling 
his  eggs  this  way,  a  more  common  method  is  to  take  them  to  a 
neighboring  country  town  and  dispose  of  them  to  the  store- 

•  Carver,  Principles  of  Political  Economy,  p.  192. 


130  OUR  ECONOMIC   ORGANIZATION 

keeper.  A  village  storekeeper  thus  acts  as  a  first  centralizing 
depot  where  the  eggs  from  the  entire  neighborhood  are  collected. 
In  some  cases  the  storekeeper  runs  the  eggs  over  his  "  candling 
machine  "  and  discards  those  that  are  spoiled.  If  he  does  this, 
he  is  performing  a  second  task,  that  of  grading,  which  must  be 
done  before  people  in  the  cities  care  to  purchase  eggs. 

The  storekeeper  in  the  country  town  is  in  hardly  a  better 
position  to  sell  eggs  directly  to  the  consumers  in  the  cities  than 
was  the  farmer.  No  more  than  the  farmer  does  he  know  how 
many  eggs  are  desired  by  any  particular  family  nor  just  what 
families  wish  such  goods.  In  other  words,  he  has  no  "  market 
connections  "  with  consumers  in  the  city.  He  might,  of  course, 
make  such  market  connections,  but  experience  has  shown  him 
that  it  is  simpler  to  pass  the  eggs  on,  a  large  quantity  at  a  time, 
to  some  one  in  the  city,  and  let  him  perform  this  function  of 
finding  consumers. 

In  the  height  of  the  egg-laying  season,  the  storekeeper  of  a 
fairly  large  town  may  collect  a  half  carload  or  even  a  carload 
of  eggs  in  the  period  of  a  week.  He  now  ships  these  to  a  buyer 
of  eggs  in  quantity  in  the  city.  Such  a  quantity  buyer  is  some- 
times called  a  "  wholesale  receiver  "  or  "  large  dealer  "  or 
"  centralizer."  The  wholesaler  usually  grades  the  eggs  care- 
fully into  "  selects,"  "  seconds,"  "  spots,"  and  other  classes 
according  to  their  quality.  This  wholesaler,  like  those  who  have 
handled  the  eggs  ahead  of  him,  might  possibly  sell  them  directly 
to  consumers.  But  he  is  hardly  in  a  position  to  know  the  wishes 
of  all  the  people  in  every  locality  of  a  city  (and  he  is  very  busy 
with  these  other  tasks).  As  we  might  expect,  therefore,  still 
other  specialized  middlemen  come  in  to  take  care  of  this  function. 
The  centralizer  or  large  dealer  could  sell  to  the  grocery  stores, 
the  hotels  and  restaurants,  and  the  bakers  which  are  the  prin- 
cipal channels  through  which  eggs  pass  to  consumers.  But 
even  of  these  there  are  so  many  in  a  city  of  any  size  that  it  is 
difficult  for  him  to  keep  in  touch  with  all  of  them  and  know  the 
market  needs  and  desires  of  each.  In  some  cases  he  does  sell 
directly  to  these  buyers.     In  other  cases,  he  relies  on  men  called 


THE   SPECIALIZATION   OF   BUSINESS  UNITS        131 

"  jobbers  "  to  keep  in  constant  touch  with  the  needs  of  all  the 
bakers,  grocers,  hotels,  restaurants,  and  other  retail  outlets  and 
to  sell  them  the  number  and  quality  of  eggs  demanded. 

The  jobbers  who  find  a  market  for  the  eggs  received  by  the 
wholesaler  are  not  the  only  persons  to  whom  the  stock  might 
be  disposed  of.  Eggs  are  laid  in  largest  numbers  during  the 
months  of  March,  April,  May,  and  June.  The  supply  which 
pours  into  the  cities  during  the  "  laying  months  "  must,  if  we 
are  to  be  provided  during  the  winter,  be  so  conserved  as  to  last 
throughout  the  year.  Therefore,  certain  individuals  who  be- 
lieve it  will  be  profitable  to  store  and  preserve  eggs  purchase 
them  from  the  wholesale  receiver  and  place  them  in  cold  storage 
warehouses.  Here  they  are  kept  until  winter,  when,  during 
the  scarce  season,  they  are  sold,  usually  through  the  jobbers, 
to  the  bakers,  grocers,  hotels,  and  restaurants. 

The  diagram  which  follows  shows  the  specialists  who  com- 
monly cooperate  in  producing  for  a  city  dweller  the  eggs  he 
uses.  We  must  not  imagine  that  there  are  never  any  varia- 
tions in  this  line  of  specialists.  Sometimes,  eggs  are  shipped 
directly  from  farms  to  city  residences ;  sometimes  other  middle- 
men than  those  we  have  mentioned  take  part  in  the  work  of 
marketing  eggs.  For  purposes  of  comparison  a  similar  diagram 
is  presented  showing  the  specialists  who  usually  cooperate  in 
producing  wheat  flour. 

Specialized  business  units  cooperate  in  most  production.  — 
Even  though  we  saw  the  "  why  "  of  various  specialized  business 
units  in  our  earlier  studies,  it  may  still  appear  strange  that  so 
many  different  businesses  take  part  in  producing  almost  any 
single  article  we  consume.  Perhaps  still  another  illustration 
or  two  may  be  helpful. 

When  a  shoe  or  any  other  article  has  been  completed  in  the 
factory  where  it  is  made,  it  is  of  no  more  use  to  us  than  if  it  had 
not  been  manufactured,  if  we  are  at  a  distance  from  the  factory. 
Before  we  can  wear  shoes  they  must  be  brought  to  a  place 
where  we  live  and  must  be  on  hand  at  the  time  and  at  the  spot 
where  we  can  secure  them  to  supply  our  needs.     When  a  manu- 


132 


OUR   ECONOMIC   ORGANIZATION 


facturer  has  made  shoes  it  would  be  possible  for  him  to  convey 
them  to  the  users,  as  the  old  medieval  merchant  often  conveyed 
his  goods.  Usually,  however,  the  manufacturer  of  goods  does 
not  attempt  to  bring  his  wares  to  the  consumer.  For  this 
part  of  the  process  of  production  he  depends  upon  a  number  of 
specialists.     The  manufacturer  of  shoes,  for  instance,  sometimes 


Bakeries 


Cooperating  Specialized  Business  Units  in  Egg  Production 

Who  is  the  producer  of  the  eggs  enjoyed  by  the  consumer?     Is  it  fair  that 
the  consumer  should  pay  for  all  of  these  specialized  services? 

sells  the  output  of  his  factory  to  a  number  of  wholesale  shoe 
dealers.  These  wholesalers  in  turn  supply  the  requirements 
of  a  large  number  of  retail  stores  and  the  retail  stores  resell 
the  goods  to  users. 

A  manufacturer  of  light  hardware,  —  knives,  locks,  keys,  and 
razors,  for  instance  —  seldom  makes  an  effort  to  sell  his  goods  to 
the  people  who  will  use  them.  More  often  he  sells  the  entire 
output  of  his  factory  to  wholesale  hardware  dealers,  who  in  turn 
supply  retailers,  who  supply  consumers.  This  is  only  saying 
that  these  business  men  complete  the  production  of  the  articles. 


THE   SPECIALIZATION   OF   BUSINESS  UNITS        133 


Miller  (Who  turns  tin; 
wheat  into  flour. ) 

Grocers  and  Bakeries 

Consumers 

Foreign  Markets 


Cooperating  Specialized  Business  Units  in  Wheat  Flour  Production 

It  is  such  cooperative  production  that  raises  difficult  problems  of 
organization  and  reward. 

The  cooperation  of  these  speciahzed  business  units  and  of 
others  can  also  be  made  more  clear  by  charts.^ 


Light  Hardware 


Manufacturer 


Wholesaler 


Retailer 


Consumer 


Groceries 


Manufacturer 


Wholesaler 


Retailer 


Consumer 


Heavy  Hardware 


'  From  Paul  H.  Nystrom,  The  Economics  of  Retailing,  pp.  37-40. 


134 


OUR  ECONOMIC  ORGANIZATION 


Business  units  cooperate  in  producing  services.  —  When 
one  of  us  buys  an  article,  say  a  knife,  we  are  buying  not  only 
the  metal  of  which  the  knife  is  made  but  the  work  of  all  the 
persons  who  aided  in  producing  the  knife.  We  must  expect  to 
pay,  for  instance,  for  the  services  which  mechanics  contribute 
to  our  use  and  the  work  of  the  salesman  who  helped  us  select  it 
at  the  store.  So  it  is  if  we  attend  an  opera  or  a  moving  picture 
theater  — we  expect  to  pay  for  the  services  of  singers  and  actors. 

Now  it  is  conceivable  that  the  mechanics  might  come  directly 
to  our  house  and  do  the  work  that  was  necessary  to  give  us  a 
knife,  just  as  the  shoemaker  was  known  to  do  in  the  past  and 
as  the  dressmaker  still  does  sometimes.  So,  too,  the  singer  or 
actor  might  come  to  our  homes  and  entertain  us.  Usually, 
however,  these  persons  do  not  try  to  produce  their  services  in 
this  complete  way.  They  bring  them  part  way  —  sell  them 
to  certain  business  units  —  first  putting  them  in  a  form  where 
these  business  units  can  convey  them  to  us  or  pass  them  on  to 


Services  of  a 
Short-story  Writer 


Services  of  a 
Mechanic 


Services  of  a  Moving- 
picture  Actor 


Literary  Agency 


Magazine  Publisher 


i  News  Agency 


Employment 
Agency 


Film  Manufacturing 
Company 


Manufacturer  of 
Hardware 


Magazine  Dealci 


Film  Exchange 
Company 


Jobber  of  Hardware  Local  Theater 


Magazine  Reader 


Retailer 


i  Patron  of  Theater 


Consumer  of 
Hardware 


THE   SPECIALIZATION   OF   BUSINESS  UNITS        135 

still  other  businesses  which  can  do  so  even  better.  The  dia- 
grams on  the  previous  page  show  some  of  the  specialized  busi- 
ness units  that  cooperate  in  producing  for  consumers'  use 
certain  services. 

It  is  hardly  necessary  to  point  out  that  this  production  of 
services  by  specialized  business  units  multiplies  very  greatly 
the  number  of  persons  whom  the  individual  can  serve,  nor  is  it 
necessary  to  say  that  want-gratification  is  thereby  increased. 

Specialization  in  producing  money  services.  —  Still  another 
example  of  the  way  in  which  specialized  businesses  aid  us  in 
securing  what  we  want  may  be  seen  by  noticing  the  way  in  which 
the  services  of  money  are  produced  for  those  who  wish  to  secure 
such  services  —  that  is  to  borrow. 

Suppose  that  you  have  $1000.  Another  man  in  your  town 
may  be  very  anxious  to  secure  the  services  of  $1000  to  use  in 
building  a  house.  He  does  not  know  that  you  have  money  which 
you  wish  to  loan  and  you  do  not  know  that  he  desires  to  borrow. 
You  might  be  able  to  loan  your  money  by  canvassing  the 
various  people  of  your  town  and  finding  out  who  wished  to 
borrow.  This  would  be  a  slow  and  difficult  task.  Further- 
more it  would  be  riskj^  for  you  to  loan  your  money  in  this  fashion 
because  you  would  not  ordinarily  be  sure  which  people  could  be 
trusted  to  fulfill  their  promises  to  repay  you.  In  almost  every 
town  or  city  there  are  business  men  who  aid  in  making  loans. 
Such  a  business  man  is  often  called  a  loan  agent.  To  him  come 
people  who  wish  to  borrow,  and  to  him  go  people  who  wish  to 
lend.  His  office  becomes,  therefore,  a  market  place  in  which 
the  services  of  money  are  bought  and  sold.  Since  his  work 
is  "  between  "  lender  and  borrower,  it  is  quite  serviceable  to 
speak  of  him  as  a  financial  middleman.  He  will  give  the  time 
and  place  utility  to  the  money  which  the  borrower  wants.  His 
office  is  therefore  a  business  unit  aiding  in  producing  money 
services.  Loan  agents'  offices  are  not  the  only  business  units 
that  aid  in  marketing  the  services  of  money.  Savings  banks 
do  much  the  same  work.  The  individual  who  has  surplus 
money Jeaves  it  with  the  savings  bank  for  a  return  of  two  or 


136 


OUR   ECONOMIC   ORGANIZATION 


three  or  four  per  cent  interest.  The  savings  bank  resells  the 
services  of  this  money  for  a  higher  rate  of  interest  to  men  who 
wish  to  borrow.  The  ordinary  commercial  banks  which  are 
common  in  all  of  our  cities  perform  a  somewhat  similar  service. 
Money,  which  we  deposit  there  and  which  the  bank  promises 
to  repay  us  in  equal  amount,  furnishes  a  basis  for  loans  to  mer- 
chants under  conditions  which  we  shall  study  in  more  detail 
later. 

Sometimes  business  companies  or  corporations  or  the  govern- 
ment wish  to  borrow  money  for  a  long  period  of  time.  When 
they  do  so  the  written  promise  to  pay  which  they  give  is  usually 
called  a  bond.  Certain  men  make  it  their  business  to  bring 
together  people  who  have  money  to  loan  for  long  periods  and 
borrowers  who  desire  such  services.  To  carry  on  their  trans- 
actions these  men  establish  offices  or  business  houses  which 
are  commonly  called  bond  houses. 

The  following  diagram  shows  some  of  the  business  units 
which  may  aid  in  producing  the  services  of  money  for  those 
who  want  it. 


,^ 

^ 

/ 

/ 

Services  c 

f  Money 
1        " 

-^ 

/ 
Com- 

1 

\ 

Building 

Bond 

Savings 

Loan 

and  Loan 

Ho 

uses 

ma 
Be 

rciai 
ink 

1 

Bank 

Ag 

ent 

Ass 
ti 

ocia- 
ons 

Manufac 

turers, 

1 

Priv 

ate 

Mei 

nbers 

Railroads, 

Manufac- 

Borrowers 

Borrower  for 

of  the 

or  Other 

turer  and 

for 

Buying  a 

Associa- 

Corporations, 

Merchant 

Business 

Building  Lot, 

tion  for 

or 

Borrowers 

Purposes 

a  Home, 

Home 

Government 

etc. 

Building 

It  will  be  worth  while  in  looking  at  this  diagram  to  ask  your- 
self this  question.  If  it  is  your  money,  the  services  of  which 
finally  reach  the  borrower,  who  produces  it  for  the  borrower? 


THE   SPECIALIZATION   OF   BUSINESS  UNITS       137 

Do  you,  or  does  one  of  these  specialized  business  units,  or  do 
both? 

These  examples  and  discussion  probably  make  clear  what  is 
meant  by  speaking  of  specialization  of  business  or  economic 
units  as  a  "  means  "  of  production.  But  these  illustrations 
show  only  a  part  of  the  truth.  Working  with  or  between  all 
these  specialized  businesses  are  many  others  which  aid.  Some 
of  those  most  easy  to  see  are  newspapers  and  other  media 
which  make  possible  the  rapid  transfer  of  information  —  a 
service  in  which  the  government  also  assists  through  its  post- 
office  and  its  various  market  services.  Railroad,  telegraph, 
and  telephone  companies  are  indispensable  to  such  organizations 
as  those  which  we  have  been  examining.  Insurance  companies 
and  other  agencies  also  play  their  part  by  assisting  in  risk  bear- 
ing. 

Organized  exchanges.  —  One  type  of  specialized  business 
unit  is  of  such  importance  and  so  often  misunderstood  that  it  is 
worth  special  attention.  This  unit  is  the  organized  exchange. 
Organized  exchanges  may  be  thought  of  as  business  units 
(they  are  usually  in  control  of  a  group  of  men  known  as  members) 
which  furnish  a  convenient  place  for  buying  and  selling  certain 
kinds  of  goods  on  a  large  scale  and  under  certain  rules.^  So 
far  as  buying  and  selling  are  concerned  they  are  merely  a  market 
place.  The  commodities  sold  are  not  owned  by  "  the  exchange  " 
and  are  not  brought  in  in  bulk.  All  selling,  as  we  shall  see,  is 
practically  always  done  by  sample  or  by  description.  Bourses, 
boards  of  trade,  chambers  of  commerce,  and  merchants'  ex- 
changes are  some  of  the  names  given  these  exchanges.  The 
grain  exchanges  will  serve  well  to  illustrate  this  type  of  special- 
ized economic  unit. 

In  many  of  the  large  cities  such  as  Chicago,  Minneapolis, 
Kansas  City,  and  St.  Louis  there  have  been  established  such 
market  places  in  which  wheat  and  other  grains  may  be  bought 
and  sold  and  in  which  buyers  and  sellers  congregate  or  are  repre- 

1  The  work  of  exchanges  in  making  possible  risk-bearing  contracts  will  be  discussed 
later. 


138  OUR  ECONOMIC   ORGANIZATION 

sented  by  others.  The  Chicago  exchange,  the  most  impor- 
tant in  the  grain  trade,  is  called  the  Board  of  Trade.  Any  one 
who  has  grain  to  sell  may  offer  it  for  sale  in  these  market  places. 
Any  one  who  wishes  to  buy  grain  may  buy  it  there.  If  he  is 
not  a  member  of  the  exchange,  he  must  secure  the  services  of 
some  one  who  is  a  member,  in  order  to  carry  on  these  trans- 
actions, which  are,  of  course,  always  on  a  large  scale.  It  is  in 
these  grain  exchanges  (which  are  usually  simply  a  large  room 
appropriately  arranged  and  equipped)  that  the  local  elevators 
in  the  country  towns  offer  their  wheat  for  sale  to  buyers,  and 
it  is  in  this  same  market  that  the  men  who  wish  to  sell  grain 
abroad  place  their  purchase  orders.  Indeed,  buj^ers  and  sellers 
from  all  over  the  world  buy  and  sell  grain  in  these  market  places 
through  their  agents,  the  brokers.  "  The  exchange  itself  is 
not  organized  for  the  making  of  money,  and  does  not  fix  prices 
or  make  transactions  in  the  trade  as  an  organized  body.  It 
is  merely  instrumental  in  affording  a  convenient  market  place,  in 
regulating  trade,  and  in  disciplining  the  conduct  of  its  members. 
Its  members  act  on  their  own  responsibility."  ^  No  one  needs 
to  use  these  exchanges  unless  he  wishes,  but  in  point  of  fact 
most  of  the  large  transactions  in  grain  and  certain  other 
commodities  occur  on  the  exchanges. 

Information  from  all  over  the  world  concerning  the  demand 
and  supply  of  grain  is  continually  being  collected  and  sent  by 
wire  or  letter  to  the  grain  exchanges.  Reports  come  in  con- 
tinually on  the  conditions  of  crops  in  this  and  other  countries ; 
on  existing  supplies  of  grain  ;  on  weather  conditions  which  would 
affect  growing  crops ;  on  wars  and  rumors  of  wars ;  in  brief, 
on  all  possible  matters  which  might  affect  the  demand  or 
supply  of  foodstuffs.  The  buyers  and  sellers  become  very  ex- 
pert in  judging  whether  certain  conditions  will  result  in  an  in- 
crease or  a  decrease  of  the  grain  supply,  or  in  on  increase  or  a 
decrease  of  the  demand  for  grain.  The  price  which  they  are 
willing  to  pay  or  to  take  for  grain,  depends,  of  course,  upon 

'  S.  S.  Heubnpr,  The  Functions  of  Produce  Exchanaes,  Annals  of  the  American  Academy 
of  Political  and  Social  Science,  XXXVIII,  pp.  :n'.)-3;{9. 


THE   SPECIALIZATION   OF   BUSINESS   UNITS        139 


140  OUR   ECONOMIC   ORGANIZATION 

those  conditions.  It  is  easy  to  see  how  a  man  accustomed  to 
examining  all  the  information  which  flows  in  to  an  exchange 
can  tell  much  more  accurately  the  price  at  which  grain  should 
sell  than  can,  for  instance,  a  western  farmer  or  country 
elevator  man  who  has  little  access  to  such  information  and 
little  skill  in  evaluating  it.  Perhaps  most  important  is  the 
convenience  with  which  sellers  pass  their  share  in  production  on 
to  the  other  specialized  business  units  that  are  to  continue  the 
work. 

The  price  at  which  grain  sells  as  a  result  of  the  bargaining  in 
these  central  markets  is  immediately  telegraphed  all  over  the 
world  and  grain  even  in  the  most  remote  country  districts  is 
bought  and  sold  on  the  basis  of  the  prices  which  are  determined 
here.  Thus,  a  farmer  in  western  Minnesota  is  able  at  any  time 
to  know  exactly  what  his  grain  is  worth  "  on  the  market."  He 
will  receive  a  price  only  a  few  cents  less  than  that  which  is 
offered  on  the  Minneapolis  or  Chicago  Grain  Exchange.  Some 
difference  in  price  is  necessary,  of  course,  to  cover  costs  of 
transportation,  insurance,  and  the  profits  of  those  handling  it. 
The  grain  exchanges  in  different  cities  keep  closely  in  touch 
with  one  another  by  telegraph,  and  a  practice  called  "  arbitrag- 
ing  "  results  in  keeping  prices  in  all  of  them  in  close  relation- 
ship. For  example,  if  the  price  on  the  Chicago  Board  of  Trade 
should  "  get  out  of  line  "  by  being  higher  than  the  Minneapolis 
price  plus  transportation  charges,  Minneapolis  buyers  would 
probably  purchase  in  large  quantities  in  Minneapolis  and  sell 
in  Chicago  through  their  brokers  on  the  Chicago  exchange. 
This  would  cause  the  price  of  wheat  to  rise  in  Minneapolis, 
and  to  fall  in  Chicago  until  the  prices  in  the  two  cities  were  no 
wider  apart  than  the  cost  o/  shipping  wheat  between  them. 
This  arbitraging  is  sometimes  carried  on  even  between  markets 
in  different  countries,  as  between  Chicago  and  Liverpool,  and  in 
this  way  the  price  of  wheat  and  other  grains  is  kept  in  balance 
all  over  the  world. 

The  other  exchanges  are  quite  similar  to  the  grain  exchange 
in  organization,   methods  of  work,  and  in  services  rendered. 


THE    SPECIALIZATION    OF   BUSINESS   UNITS        141 

The  following  list  of  persons  represented  on  a  cotton  exchange 
serves  to  show  the  extent  of  its  influence  and  how  truly  it 
acts  as  one  specialized  agency  among  the  various  speciaUsts 
in  our  society  who  are  productive  in  raising  cotton  and  in 
cotton  manufacturing.^ 

1.  Commission  merchants  who  sell  cotton  for  planters. 

2.  Exporters  who  buy  cotton  for  spinners  and  merchants  in  Europe. 

3.  Merchants  who  buy  cotton  for  spinners  in  the  United  States. 

4.  Bankers  through  whom  all  bills  of  exchange  drawn  against  cotton 
are  negotiated. 

5.  Ship  agents  who  represent  the  great  fleet  of  steamers  and  sailing 
vessels  by  which  the  cotton  is  carried  abroad  and  to  domestic  ports. 

6.  Insurance  agents  who  arrange  the  insurance  on  the  bulk  of  the 
cotton  seeking  a  market  through  tliis  port. 

7.  Cotton  brokers. 

8.  Expert  judges  of  the  raw  material,  who  buy  cotton  from  repre- 
sentatives of  the  planters  for  the  merchants  who  ship  to  Europe  and 
to  American  spinners. 

9.  Future  brokers,  who  buy  and  sell  contracts  for  forward  delivery 
for  account  of  members  of  the  exchange,  or  for  merchants  and  spinners 
in  Europe  and  the  United  States. 

Certain  evils  have  grown  up  around  these  organized  exchanges 
and  some  persons  believe  that  they  do  more  harm  than  good 
and  ought  to  be  abolished.  It  is  quite  generally  agreed,  how- 
ever, that  such  a  position  is  an  extreme  one.  The  exchanges 
render  us  good  service.  It  ought  to  be  possible  to  retain  this 
good  service  and  to  eliminate  the  evils  which  have  crept  in. 

Conditions  prerequisite  to  the  establishment  of  organized 
markets.  —  Since  the  organized  exchanges  are  so  useful  the 
question  naturally  arises,  why  are  they  not  used  for  all  goods? 
It  will  be  clear  upon  reflection,  however,  that  organized  markets 
can  wisely  be  set  up  only  under  conditions  which  apply  as  yet 
to  relatively  few  commodities. 

In  the  first  place  the  demand  for  the  good  must  be  so  large 
and  so  general  that  it  will  be  worth  while  to  set  up  such  a  large 

•  Report  of  the  Industrial  Commission,  XI,  27. 


142 


OUR   ECONOMIC   ORGANIZATION 


and  complex  set  of  connections  as  exists,  for  example,  in  the 
cotton  exchange.  Most  goods  do  not  have  such  a  large  volume 
of  demand. 

In  the  second  place,  the  goods  must  be  of  a  kind  which  will 
enable  people  to  sell  it  by  sample  or  "  by  description,"  If  a  good 
is  to  be  sold  by  description  it  must  be  possible  to  standardize 


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wk.\ 

^^***'"^'Hi^T--'W  "^ 

Courtesy  of  Chicago  Board  of  Trade 

Scene  in  Grain  Testing  and  Grading  Department  of  the  Chicago 
Board  of  Trade 

The  samples  of  grain  taken    from  freight  cars  are   carefully   tested  and 
graded  by  experts  appointed  by  the  state  of  lUinois- 

it  and  grade  it  so  that  people  will  know  exactly  what  they  are 
buying  or  selling  when  they  deal  in  one  of  its  grades. 

Let  us  see  how  sales  by  sample  and  description  work  out  in  the 
case  of  wheat.  Suppose  that  a  local  elevator  owner  in  North 
Dakota  has  purchased  a  large  quantity  of  wheat  from  farmers 
and  that  he  wishes  to  sell  this  wheat  immediately.  Among  the 
persons  who  would  be  willing  to  buy  this  wheat  are  millers, 
exporters,  and  large  terminal  warehouse  men.  They  cannot 
go  to  his  distant  elevator  and  inspect  this  wheat ;  neither  can 
he  exhibit  it  to  them.  How  then  is  a  sale  to  be  consummated  ? 
The  difficulty  of  such  a  case  is  avoided  by  a  careful  system  of 


THE   SPECIALIZATION   OF   BUSINESS  UNITS       143 

grading  and  inspection  which  has  been  worked  out.  The  work 
has  been  most  carefully  done.  Number  1,  Northern  Spring 
Wheat,  for  instance,  means  a  certain  definite  quality  of  wheat, 
while  number  2,  Northern,  and  number  3,  Northern,  other 
equally  definite  types.  Various  other  grades  are  estabhshed 
so  that  although  a  buyer  may  purchase  only  by  such  a  de- 
scription as  one  of  these  names  he  knows  quite  definitely  what 
quality  of  grain  he  is  purchasing.  The  elevator  owner  may 
ship  the  wheat  in  carloads.  Buyers  in  terminal  markets  do  not 
need  to  go  and  see  the  grain.  Samples  are  taken  from  which 
the  grain  may  be  sold  by  sample  or  grade. 

The  way  the  state  of  Minnesota  inspects  the  wheat  shipped 
to  Minneapolis  furnishes  a  good  example  of  how  grain  is  ex- 
amined to  determine  its  grade.^  When  the  cars  reach  the 
railroad  yards,  or  in  some  cases  when  they  are  still  many  miles 
from  Minneapolis,  they  are  entered  by  carefully  selected  in- 
spectors called  samplers.  The  method  used  by  the  samplers 
is  as  follows :  each  has  a  long  tubular  brass  instrument  some- 
what like  a  piece  of  iron  pipe  which  is  divided  into  separate 
chambers.  This  is  called  a  probe.  It  is  inserted  in  the  wheat 
from  the  top  to  the  bottom  of  the  car.  The  small  doors  opening 
into  the  separate  chambers  of  the  probe  are  opened,  the 
chambers  filled  with  grain,  and  the  doors  are  then  closed.  The 
probe  now  contains  samples  of  the  grain  taken  at  different 
depths.  The  sampler  takes  a  number  of  samples  from  various 
parts  of  the  car  to  make  sure  that  the  grain  is  uniform  through- 
out, or  if  not  uniform,  to  enable  him  to  judge  the  extent  to 
which  screenings  or  dirt,  or  inferior  grades  have  been  in- 
troduced into  any  part  of  the  load.  From  the  samples  which 
have  been  thus  obtained,  the  state  inspection  department  of 
Minnesota  determines  the  grade  of  the  grain  in  the  car,  which 
may  now  be  sold  by  description.  It  is  possible  to  sell  the 
grain  as  of  a  given  grade  even  before  the  inspection  has  been 
made  and  then  allow  a  discount  or  dockage  if  the  grain  proves 
to  be  of  lower  grade.     Inspection  in  the  larger  grain  states  is 

1  Cf.  L.  D.  II.  Weld,  The  Marketing  of  Farm  Products,  pp.  370-370. 


144  OUR  ECONOMIC   ORGANIZATION 

generally  made  by  the  state  government,  but  in  the  eastern 
states  it  is  usually  done  by  the  exchanges  themselves.  In  some 
states  both  the  exchanges  and  the  state  government  inspect. 

In  the  case  of  cotton  the  grades  have  been  established  after 
very  painstaking  study  by  our  federal  government.  Its  agents 
also  do  the  inspecting  and  the  assigning  of  grades.  The  grades 
thus  established  are  the  basis  for  most  of  the  cotton  sales  made 
in  this  country. 

The  cooperation  of  specialized  business  units.  —  One  of  the 
interesting  things  about  these  specialized  business  units  which 
aid  so  greatly  in  producing  want-gratifying  goods  is  the  way 
they  are  knitted  together.  It  is  indeed  interesting  and  sur- 
prising that  they  should  be  bound  together  and  work  together 
as  well  as  they  do.  There  is  no  general  "  boss  "  or  authority 
which  tells  each  one  what  work  it  shall  do.  There  is  no  general 
authority  or  manager  who  decides  that  eggs  for  the  user  shall 
be  produced  in  part  by  the  farmer,  in  part  by  the  wholesale 
estabhshment,  in  part  by  the  retail  store.  The  organization 
or  cooperation  of  all  these  individual  units  is  left  to  the  directors 
or  managers  of  each  unit.  Each  of  these  managers  is  working 
in  his  own  interest  and  with  the  desire  to  make  as  much  profit 
as  possible.  In  this  way  a  business  unit  is  likely  to  be  eliminated 
if  it  performs  some  task  less  efficiently  than  another  business 
can  do  it.  Sometimes  it  is  said  that  this  cooperation  is  a 
cooperation  by  exchange,  but  this  term  if  so  used  is  only  another 
way  of  saying  that  the  cooperation  of  all  these  specialists  is 
effected  through  the  efforts  of  each  to  seek  his  own  financial 
welfare. 

Eliminating  the  middleman  does  not  eliminate  his  functions. 
—  As  time  has  gone  on,  certain  usages  of  terms  have  become 
customary.  We  have  come  to  call  "  functional  middlemen  " 
those  specialized  institutions  (such  as  railroads,  insurance 
companies,  and  banks)  which  are  not  thought  of  as  standing 
directly  between  the  "  producer  "  and  the  "  consumer,"  but  which 
serve  all  other  specialized  business  units.  We  have  come  to 
call  simply  "  middlemen  "  those  speciaUzed  institutions  (such 


THE   SPECIALIZATION   OF   BUSINESS  UNITS       145 

as  wholesaler  or  jobber,  broker,  and  retailer)  which  do  stand 
directly  between  the  "  producer  "  and  the  "  consumer." 

The  "  middleman  "  has  come  in  for  a  deal  of  blame  in  recent 
years  —  for  much  more  blame  than  he  really  deserves.  A 
great  many  people  do  not  realize  clearly  that  production  is  not 
completed  when  the  goods  we  want  have  been  "  made  "  by  the 
farmer  or  the  manufacturer.  There  is  still  much  "  producing  " 
which  must  take  place.  Goods  must  be  "  assembled  "  from 
wide  areas  and  "  transported  "  to  the  place  where  they  are  to  be 
consumed  ;  frequently  they  must  be  "  stored  "  for  a  time ;  they 
must  be  "  rearranged,"  that  is,  must  be  divided  into  pounds, 
yards,  or  dozens  to  suit  the  convenience  of  the  consumer ;  these 
various  matters  must  be  "  financed  "  and  in  all  of  them  there 
is  "  assumption  of  risks  "  such  as  those  of  spoiling  or  other 
forms  of  deterioration. 

Somebody  must  perform  these  various  functions ;  there  is  no 
way  of  escaping  this  necessity.  It  may  well  be  that  in  some 
cases  these  matters  can  be  more  efficiently  and  more  cheaply 
handled  by  the  manufacturer  or  the  consumer  than  by  the 
middleman.  Certainly,  in  some  cases  the  manufacturer  and 
the  consumer  are  taking  over  these  functions.  We  must  not 
deceive  ourselves,  however,  concerning  what  this  means.  The 
middleman  has  been  eliminated,  but  the  functions  he  performed 
have  not  been  wiped  out ;  they  have  merely  been  taken  over 
by  others.  It  costs  these  others  something  to  perform  them ; 
the  question  at  issue  is  whether  it  costs  as  much  as  it  costs  to 
have  them  performed  by  the  middleman.  Perhaps  it  is  a  bit 
unfortunate  that  we  use  the  term  "  middlemen."  Certainly 
we  ought  to  think  of  them  not  merely  as  people  "  standing 
between  "  the  producer  and  the  consumer,  but  as  producers 
who  are  continuing  a  process  which  has  been  begun  by  others. 

PROBLEMS 

1.  Make  a  list  of  the  most  important  articles  of  wealth  you  enjoy 
which  are  supplied  in  whole  or  in  part  by  other  people.  Make  another 
list  of  those  things  supplied  by  your  own  unaided  activities.     Do  these 


146  OUR  ECONOMIC   ORGANIZATION 

lists  justify  the  use  of  the  term  "  cooperative  "  as  descriptive  of  the  ex- 
isting economic  order  ? 

2.  Formerly  people  gratified  their  wants  directly,  —  they  pro- 
duced what  they  consumed.  Nowadays  specialists  pour  products  — • 
wealth  and  services  —  into  a  vast  social  reservoh  and  then  draw  from 
this  reservoir  the  things  they  consume.  Does  this  seem  to  you  sub- 
stantially true?     Name  some  of  the  specialists. 

3.  "The  business  man  thinks  he  is  engaged  in  getting  a  Uving. 
He  is.  He  is  also  engaged  in  a  vast  cooperative  enterprise  as  large  as 
all  industrial  society."  Is  tliis  true?  If  it  is,  has  it  always  been  true? 
Are  all  ways  of  getting  a  living  forms  of  what  we  call  "business"? 

4.  Our  society  is  a  cooperative  society.  Was  manorial  economy 
cooperative?    Would  communism  be  cooperative? 

5.  Find  out  either  from  some  local  coal  dealer  or  some  automobile 
dealer,  or  some  dry  goods  dealer,  the  marketing  channel  through  which 
his  commodity  comes  to  him,  and  bring  to  class  a  chart  showing  this 
marketing  channel. 

6.  Make  a  list  of  business  concerns  in  your  city  which  have  services 
to  sell.  A  legal  firm  would  be  one  example  of  this.  Make  a  list  of 
business  organizations  which  are  engaged  in  marketing  the  services 
of  other  people, 

7.  You  are  an  expert  machinist.  There  is  only  one  machine  shop 
in  your  town.  Where  are  you  Ukely  to  sell  your  labor?  If  three  new 
factories  came  to  your  town,  what  would  happen  to  the  market  for 
your  services  ?  -     , 

8.  You  are  an  expert  machinist.  Make  a  list  of  all  of  the  ways  in 
which  the  market  for  your  labor  could  be  widened. 

9.  List  other  producers  who  might  aid  in  producing  for  a  consumer 
the  services  of  a  bricklayer,  a  school  teacher,  a  trapper,  a  surgeon. 

10.  "Specialization  and  cooperation  between  business  units  do  not 
really  help.  Time  and  energy  are  spent  in  merely  passing  goods  on." 
Do  you  agree? 

11.  Why  does  not  the  farmer  who  raises  live  stock  sell  meat  directly 
to  persons  living  in  the  city?  Why  do  not  those  of  us  who  live  in  large 
cities  purchase  oranges  direct  from  the  growers  in  California? 

12.  Are  there,  besides  the  retailers,  grocery  jobbers  in  your  town? 
If  so,  find  out  what  they  do  that  is  not  done  by  the  retailers. 


THE   SPECIALIZATION  OF  BUSINESS  UNITS  147 

13.  A  certain  grocer  often  expresses  regret  that  the  obligations  to 
support  a  family  compel  him  to  continue  in  an  occupation  which  makes 
him  a  "parasite"  — one  who  lives  on  others,  consuming  without  pro- 
ducing.    Is  his  position  well  taken  ? 

14.  "The  mail  order  house,  such  as  that  of  Sears,  Roebuck  and  Co., 
eliminates  the  function  of  the  wholesaler  and  retailer."  Is  this  true, 
or  is  it  merely  the  wholesaler  and  retailer  who  are  eliminated? 

15.  A  man  rented  a  summer  cottage  of  a  farmer  who  ran  a  poultry 
yard  and  sent  as  many  as  fifty  dozen  eggs  every  week  to  a  fii-m  in 
Chicago.  The  tenant  asked  the  farmer  to  supply  him  with  eggs  but 
was  refused  on  the  ground  that  "it  was  not  worth  while,"  although 
the  tenant  was  willing  to  carry  the  eggs  home  and  to  pay  the  Cliicago 
price.     How  do  you  account  for  this  ? 

16.  We  hear  much  of  the  elimination  of  the  middleman.  Can  his 
functions  be  eliminated  ?    What  functions  does  he  perform  ? 

17.  "Internal  commerce  does  not  increase  the  wealth  of  a  nation 
since  it  only  transfers  goods  from  one  person  to  another,"     Is  this  true  ? 

18.  Explain  how  the  organized  markets  for  selling  grain  help  in 
bringing  it  to  the  consumer. 

19.  In  what  ways  is  the  organized  exchange  of  ser-vice  to  farmers? 
To  grain  buyers  in  small  towns  ?    To  millers  ?    To  exporters  ? 

20.  What  are  some  of  the  instruments  for  bringing  information 
concerning  market  conditions  to  the  grain  exchanges?  Are  govern- 
ment weather  reports  useful  in  tliis  connection?  Would  it  be  worth 
while  for  the  traders  on  the  exchanges  to  pay  a  specialized  business 
organization  to  gather  information  and  transmit  it  to  the  exchange  ? 

21.  Why  is  it  necessary  to  have  grades  established  in  goods  which 
are  to  be  sold  by  description  rather  than  by  bulk  or  by  sample  ?  How 
is  it  possible  for  mail  order  houses  to  sell  goods  by  description  ?  Would 
you  buy  from  every  one  by  description  ? 

22.  Wliat  is  meant  by  sa}'ing  that  an  organized  exchange  pro^^des 
a  "world  price"? 

23.  Study  over  the  conditions  which  must  exist  before  an  organized 
exchange  can  be  developed  to  deal  in  a  given  commodity.  How  does 
it  happen  that  we  have  no  organized  exchanges  on  which  labor  is  bought 
and  sold  ? 


148  OUR  ECONOMIC   ORGANIZATION 

24.  Banks,  bond  houses,  loan  agents,  transportation  companies, 
and  insurance  companies  are  "functional  middlemen."  Can  you 
justify  the  name  ? 

25.  What  is  meant  by  saying  that  the  services  of  money  can  be 
sold?  Is  selling  money  services  a  market  operation?  What  are  some 
of  the  business  units  that  specialize  in  selling  money  services  ? 

26.  In  our  cooperative  production  each  specialist  in  a  series  thinks 
of  the  specialist  who  follows  him  as  a  market  for  his  goods.  Is  this 
statement  true?     Can  you  give  illustrations? 

27.  "Ours  is  a  market  society.  The  factory  to  the  mill  hand; 
the  schooner  to  the  sailor ;  the  bond  house  or  brokers'  office  to  the  man 
with  money ;  the  lyceum  bureau  to  the  singer ;  the  hog  buyer  to  the 
Iowa  farmer ;  the  padrone  to  the  laborer ;  the  munitions  plant  to  the 
copper  mining  corporation;  the  railroad  to  the  steel  company;  the 
jobber  to  the  canner ;  the  family  to  the  local  merchant  —  all  may 
represent  much  the  same  tiling."     What  thing? 

28.  Our  society  is  often  spoken  of  as  a  market  society  or  a  society 
of  market  structures.  Show  why  these  terms  are  appropriate.  Would 
they  have  been  equally  appropriate  to  English  society  in  the  manorial 
period  ? 

29.  Would  our  cooperation  of  specialists  be  possible  if  we  did  not 
have  the  law  of  contracts?  If  we  did  not  have  mechanisms  to  give 
information?     If  we  did  not  give  people  rights  of  property  in  goods? 

30.  Do  specialized  business  units  cooperate?  Does  it  seem  to  you 
that  their  cooperation  is  planned?  If  so,  by  whom?  If  not,  how  do 
they  manage  to  get  along  without  great  confusion  ? 

31.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  227-236;  Selections 
85-99. 

Bureau  of  Education,  Lessons  in  Community  and  National  Life: 
Series  A,  Lesson  A-S :  Lyon,  "  The  Cooperation  of  Specialists 
in  Modern  Society." 


STUDY  X 
SPECIALIZATION  WITHIN  BUSINESS  UNITS 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  the  workings  of  specialization  in  large-scale  business  units. 

2.  To  note  the  advantages  to  production  of  such  specialization. 

In  the  preceding  lesson  we  learned  that  production  of  want- 
gratifying  goods  is  greatly  aided  by  the  specializing  of  separate 
units  in  different  parts  of  the  task,  but  this  is  only  part  of  the 
story  of  specialization.  Within  each  of  these  specialized  busi- 
ness or  economic  units  which  we  studied,  there  has  been  worked 
out,  especially  in  those  units  which  are  of  large  size,  a  very  great 
amount  of  specialization.  It  is  with  this  specialization  ivithin 
business  units  that  we  are  most  concerned  in  this  chapter.  Per- 
haps we  can  see  most  clearly  the  meaning  of  specialization  within 
the  business  unit  if  we  look  at  it  in  rather  an  extreme  form.  Let 
us  accordingly  look  at  specialization  as  it  exists  in  one  of  our 
large  modern  factories  where  it  has  been  carried  furthest. 

As  for  those  generally  called  workers  in  such  a  plant,  it  will 
be  found  that  in  most  cases  their  specialization  has  been  carried 
beyond  the  trade  stage,  beyond  the  process  stage,  and  down 
into  the  stage  of  detailed  operations.  In  a  shoe  factory,  for 
example,  we  should  find  that  no  one  works  through  the  entire 
process  of  making  a  shoe,  but  that  the  undertaking  is  divided 
into  many  scores  of  separate  operations  each  of  which  is  worked 
at  by  some  worker  who  does  nothing  else.  We  should  find  in 
such  a  factory  that  a  "  lining-stitcher  "  sews  together  the  different 
pieces  of  the  lining ;  a  "  closer-on  "  stitches  the  lining  into  the 
shoes.  A  "  gang-punch  operator  "  punches  the  holes  for  the 
eyelets.  An  "  eyeleter  "  puts  in  the  eyelets  with  another  ma- 
chine.    A   "  hooker "   puts   in   the   hooks  with   still   another 

149 


150  OUR   ECONOMIC   ORGANIZATION 

machine.  In  working  on  the  heels,  a  ''  heel  slugger  "  drives 
into  the  heels  a  row  of  brass  or  steel  nails.  A  "  heel-scourer  " 
sandpapers  the  heel.  A  "  heel-breaster  "  cuts  the  front  of  the 
heel  with  a  knife  driven  by  a  foot  lever.  A  boy  called  an 
"  edge-blacker  "  blacks  the  edges  of  the  heels  with  a  brush. 
An  "  edge-setter  "  hardens  this  blacking  with  a  block  of  steel 
cut  to  fit  the  edge  and  heated  by  gas.  There  are  separate 
persons  to  stamp  on  the  name  of  the  company,  to  polish  the 
shoes  before  they  are  inspected,  to  inspect  them,  to  put  in  the 
laces,  to  wrap  them,  to  box  them,  and  so  on  almost  indefinitely. 
In  the  entire  factory  there  are  more  than  100  little  specialized 
tasks,  nearly  all  of  which  are  done  by  machinery.  Each  piece 
of  machinery  is  operated  by  some  one  person  who  does  nothing 
else  and  has  very  little  opportunity  to  learn  anything  about  any 
other  part  of  the  work. 

In  other  factories  specialization  of  labor  is  carried  on  quite  as 
extensively.  In  the  large  plants  of  the  meat-packing  industries, 
for  instance,  where  more  than  1000  cattle  a  day  are  killed, 
between  200  and  250  butchers,  helpers,  and  laborers  each  per- 
form some  one  specialized  task  in  the  process  of  turning  the 
live  animal  into  dressed  meat.  The  whole  animal  has  been 
surveyed  and  "  laid  out  like  a  map,"  and  each  part  of  the  work 
is  in  the  hands  of  some  one  who  does  nothing  but  one  specialized 
task.  One  man  stuns  the  animals,  a  second  gives  the  fatal 
knife  thrust,  another  farther  along  removes  waste  parts,  still 
another  inspects  the  meat.  Nine  or  ten  different  men  work 
merely  on  the  hide  of  the  animal.  In  some  of  the  plants  one 
man  does  nothing  but  pull  off  a  tail ;  a  second  skins  a  part  of 
the  animal  where  the  work  is  easy ;  a  higher-priced  man  removes 
a  part  of  the  hide  that  comes  away  with  more  difficulty ;  and 
still  a  higher-priced  man  does  the  work  which  requires  a  more 
delicate  use  of  the  knife.     So  on  throughout  the  whole  process. 

If  we  were  to  make  a  visit  to  the  large  general  office  of  one 
of  these  factories,  we  should  find  that  the  woi'k  is  as  highly 
specialized  as  in  the  shops.     In  a  survey  ^  that  was  made  in  one 

•  Bertha  Stevens,  Boys  and  Girls  in  Commercial  Work,  "Cleveland  Survey,"  p.  24. 


SPECIALIZATION    WITHIN    BUSINESS   UNITS        151 

large  American  city  and  which  covered  1955  non-managerial 

positions  held  by  men  and  boys  it  was  seen  that  the  oflSce  work 
was  specialized  as  follows : 

Bookkeepers,  etc. 

Bookkeepers,  assistants 151 

Cashiers 37 

Paymasters,  assistants 14 

Accountants,  assistants 10 

Statistical  workers 5 

Auditors,  assistants 4 

Tellers 2       223 

Stenographers 

Stenographers 174 

Private  secretaries 3        177 

Clerks 

Shipping 85 

Cost  production 63 

Receiving,  stock 59 

Sales  order 48 

Time 47 

Record  entry 20 

Mail 15 

Bill 12 

Railway 12 

Claim 7 

File,  index 7 

Inventorj'^ 7 

Invoice 6 

Scale 4 

Pricing 3 

Routing 2 

Voucher 2 

Unspecified 927     1,326 

MAcmNE  Workers 

Billers 13 

Multigraph  operators 3 

TjTjists 3          19 

General  Clerical  W^orkers 

Office  boys,  messengers 166 

Checkers  and  general  office  workers 44        210 

Total pSS 


152  OUR  ECONOMIC   ORGANIZATION 

Specialization  of  capital  in  a  large-scale  plant.  —  Division  of 
labor  is  by  no  means  the  only  kind  of  specialization  that  is  used 
in  a  large  plant  in  producing  goods  and  services.  Such  a  factory 
as  we  have  been  considering  will  give  us  plenty  of  instances  of 
the  specialization  of  capital.  In  the  meat-packing  industry, 
for  example,  specialized  knives  have  been  devised  to  make  the 
work  of  the  laborers  more  accurate  and  more  rapid.  In  a  shoe 
factory  there  is  a  machine  —  a  piece  of  specialized  capital  —  for 
almost  every  specialized  worker.  The  "  die-cutter"  uses 
specialized  dies ;  the  "  lining-stitcher  "  has  his  machine ;  the 
"  gang-punch  "  operator  has  the  machine  punch ;  the  "  heel- 
slugger  "  has  a  slugging  machine.  Even  the  boy  who  blacks 
the  edges  of  the  heels  has  his  brush  and  the  "  edge-setter  "  his 
block  of  steel.  In  other  factories,  specialized  machines  have 
been  combined  into  great  automatic  monsters  which  perform 
a  whole  series  of  operations  without  the  touch  of  a  human  hand. 
Adam  Smith  was  much  impressed  at  the  division  of  labor  in 
pin-making  in  1776,  when  there  were  eighteen  different 
operations  performed  by  as  many  workers.  It  would  be  inter- 
esting to  hear  what  he  would  say  of  the  modern  pin-making 
machine,  which  receives  at  one  end  rods  of  metal  and  delivers 
at  the  other  packets  or  papers  of  pins  neatly  folded  and  ready 
for  the  market. 

It  is  not  always  easy  to  say  whether  the  use  of  specialized 
machinery  is  a  result  or  a  cause  of  the  division  of  labor.  It  is 
a  result  in  the  sense  that  after  tasks  have  been  divided  and 
operations  have  been  repeated  by  the  worker  over  and  over,  it 
becomes  easy  and  natural  to  devise  a  machine  for  doing  this 
routine  work.  Once  the  market  is  large  enough  to  demand 
continuous  repetition  of  an  unvarying  operation,  the  great 
advantages  of  the  machine  will  cause  it  to  be  introduced  sooner 
or  later.  It  never  tires ;  the  powers  it  can  bring  to  bear  upon 
a  given  task  far  exceed  those  of  imaided  human  hands ;  the  only 
limit  to  its  speed  is  the  speed  of  its  driving  mechanism  and  the 
strength  of  its  materials ;  it  is  more  regular,  reliable,  consistent, 
and  uniform  in  its  operations  than  is  the  human  worker;   its 


SPECIALIZATION   WITHIN   BUSINESS   UNITS        153 


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154  OUR  ECONOMIC  ORGANIZATION 

touch  is,  when  necessary,  most  dehcate  —  witness  the  machines 
in  watch-making  which  gauge  measurements  to  one  twenty-five- 
thousandth  of  an  inch  and  turn  out  screws  so  fine  that  more 
than  one  hundred  thousand  are  required  to  weigh  a  pound, 
A  survey  of  such  considerations  makes  it  appear  that  the  in- 
troduction of  the  machine  is  a  result  of  the  division  of  labor 
and  of  the  merits  of  the  machine. 

The  invention  and  introduction  of  a  machine  are,  however, 
a  cause  of  division  or  specialization  of  labor  in  the  sense  that 
the  new  machine  does  the  former  specialized  task  of  the  worker 
and  creates  a  new  job  —  that  of  the  specialized  machine  tender. 
This  is  both  a  further  division  of  labor  and  a  reduction  in  the 
requirements  for  skill.  The  new  job  commonly  requires  much 
less  skill  than  did  the  old  one.  Ordinarily,  it  may  be  taught 
in  a  few  hours  or  in  a  few  days  at  the  most.  Here  we  have  one 
cause  of  the  increasing  utilization  of  women  in  modern  in- 
dustry, of  the  pressure  for  the  use  of  children  by  some  employers, 
and  of  the  scarcity  of  "  all-around  mechanics  "  when  some 
special  demand  for  large  numbers  of  them  arises. 

One  must  not  overlook  the  fact,  however,  that  the  increasing 
use  of  machinery  increases  the  demand  for  certain  kinds  of  skill. 
It  calls  for  men  who  are  skilled  in  setting  up,  regulating, 
and  repairing  machines ;  it  calls  for  ranges  or  series  of  skilled 
processes  in  engineering  and  machine-making,  even  though 
machine-making,  when  done  on  a  large  scale,  is  commonly 
separated  into  detailed  operations. 

Specialization  of  management  in  a  large-scale  plant.  —  The 
management,  too,  of  one  of  our  large-scale  business  units  is 
highly  specialized.  Speaking  in  broad,  general  terms,  such 
management  concerns  itself  with  two  sets  of  problems.  Upon 
the  one  hand  it  must  knit  together  into  one  coherent  productive 
process  the  hundreds  and  even  thousands  of  specialized  opera- 
tions which  go  on  within  the  business.  Reflect  upon  the  hun- 
dreds of  parts  of  an  automobile.  Picture  the  raw  materials 
for  these  parts  flowing  into  the  factory  in  the  right  quantities, 
at  the  right  times,  and  at  the  right  places,  for  them  to  be  made 


SPECIALIZATION    WITHIN    BUSINESS   UNITS        155 

into  automobile  parts.  Picture  these  parts  being  made  and 
flowing  together  to  form  the  finished  product,  the  timing  of  their 
flow  correct  to  the  second,  and  meeting,  not  only  one  another,  but 
scores  of  other  parts  which  have  been  bought  outside  this  partic- 
ular plant  in  finished  form.  Then  reflect  that  these  "  factory 
processes  "  must  dovetail  in  with  the  selling  operations  of  the 
plant,  and  with  the  operations  having  to  do  with  the  control  of 
its  funds.  It  is  clear  enough  that  the  management  will  have  to 
be  very  efficient  to  take  care  of  such  difficult  problems. 

But  this  plant  also  has  relations  with  the  rest  of  the  world. 
It  buys  raw  materials  and  finished  parts ;  it  deals  with 
bankers,  insurance  agents,  taxation  bureaus,  city  aldermen,  state 
factory  inspectors,  and  scores  of  other  functionaries ;  it  sells 
its  product  either  direct  to  the  consumer  or  to  middlemen. 
The  management  of  the  plant  must  take  care  of  these  problems, 
also,  and  only  an  efficient  management  can  care  for  them 
adequately. 

To  say  that  the  management  should  be  efficient  is  almost 
equivalent  to  saying  that  it  must  be  specialized,  so  numerous 
and  varied  are  the  tasks.  And  it  is  highly  specialized.  The 
treasurer  and  under  him  the  auditor  are  the  specialists  finally 
responsible  for  finances.  The  purchasing  agent,  with  a  group 
of  functionaries  under  him,  looks  out  for  purchasing  raw 
materials  and  equipment.  The  toolroom  man  sees  that  ade- 
quate tools  are  available  in  good  condition.  The  director  of 
industrial  relations  supervises  matters  connected  with  labor 
administration.  The  sales  manager,  with  perhaps  an  adver- 
tising manager  under  him,  disposes  of  the  finished  product  in 
the  market.  Over  these  and  others,  ultimately  responsible  for 
the  successful  solution  of  both  internal  and  external  problems, 
is  the  general  manager.  He  is  the  final  correlator  of  the  thou- 
sands of  specialized  operations  of  the  plant,  and  as  we  shall  see 
later,  one  of  the  agencies  for  correlating  the  plant  with  the  rest 
of  society.  He  is  the  specialist  to  whom  the  other  specialists 
in  the  organization  report — to  whom  the  owners  of  the  business 
look  for  results. 


156 


OUR  ECONOMIC   ORGANIZATION 


Organization  Chart  of  a  Manufacturing  Business 

f  Cashier 

'  Treasurer i  Bookkeeper 

[  Paymaster 
Legal 
Secretary 
Medical 


General 
Manager 


Manufacturing  Manager  . 
Chief  Engineer 


Sales  Manager J  Publicity 


Purchase 

Employment       |  Production  Clerks 

Production  .  ..  {  Dispatching 

Stores  I  Asst.  Superintendents 

„  ,  1.  Tool  Department 

f  Salesmen 


Auditor. 


Correspondence 

f  Time  Clerks 
/  Cost  Clerks 
1  Accountants 

In  the  last  few  years,  "  scientific  management  "  has  empha- 
sized the  need  of  speciaUzation  of  management  among  the  fore- 
men who  supervise  the  actual  physical  processes  in  the  factory. 
In  the  old-fashioned  factory  each  foreman  performed  a  great 
variety  of  tasks.  He  was  expected  to  be  a  good  machinist  so 
that  he  would  know  how  to  operate  the  various  machines  under 
his  supervision  ;  to  be  able  to  read  drawings  readily  so  that  he 
could  tell  from  the  drawings  which  came  up  from  the  drafting 
room  just  what  was  expected  in  the  finished  product ;  to  keep 
the  machines  in  good  order  and  supplied  with  sharp  tools  and 
such  other  appliances  as  might  be  necessary ;  to  watch  the 
quality  of  work  turned  out  by  each  man ;  to  look  out  for  the 
many  matters  connected  with  labor  administration  such  as 
hiring,  setting  rates  of  pay,  and  disciplining,  —  in  brief,  the 
old-fashioned  foreman  was  not  highly  specialized. 

In  many  modern  factories  this  has  been  changed  and  a  system 
of  functional  foremanship  has  been  introduced.  Under  this 
scheme  each  of  the  several  duties  of  the  old-fashioned  foreman 
has  been  given  to  a  specialist  who  "  foremanizes  "  in  that  field 
only.  One  foreman,  for  example,  teaches  the  workmen  what 
they  need  to  know  about  drawings  in  order  to  perform  their 
work  properly.  A  second  functional  foreman  has  nothing 
to  do  with  the  work  of  the  first,  but  has  the  special  task  of 
showing  the  workman  how  to  put  the  work  in  the  machines 


SPECIALIZATION   WITHIN   BUSINESS  UNITS        157. 

and  how  to  make  each  motion  in  the  quickest,  easiest,  and  best 
way.  A  third  has  the  special  duty  of  seeing  that  each  machine 
is  run  at  the  best  speed,  and  with  the  best  tools.  Other  func- 
tional foremen  have  taken  over  the  various  tasks  carried  on  by 
the  "  general  "  foreman  of  the  older  system. 

The  specialists  of  a  modern  factory  cooperate.  —  "  From  the 
point  of  view  of  the  individual  the  division  of  labor  means 
specialization ;  from  the  point  of  view  of  society  it  means 
cooperation,"  says  Clay.  This  is  easily  seen  to  be  true  of  the 
specialization  of  a  modern  large  manufacturing  plant.  The 
specialists  in  such  business  units  as  a  shoe  factory  or  a  packing 
house  are  all  cooperating.  The  individuals  may  know  very 
little  excepting  their  own  work.  They  may  know  almost  none 
of  the  other  specialists.  They  may  even  feel  that  they  are 
opposed  to  what  other  workmen  or  the  managers  of  the  factory 
wish  to  accomplish,  and  yet  the  work  of  all  is  cooperative  and 
interdependent.  Each  doing  his  specialized  part  cooperates 
with  each  of  the  others.  The  worker  in  a  shoe  factory  who 
cuts  a  hide  into  pieces  of  leather  for  making  a  shoe  cooperates 
with  the  men  who  stitch  those  pieces  together,  and  the  hun- 
dreds of  others  who  each  do  a  specialized  part  of  the  whole 
process  cooperate  with  each  of  the  specialized  office  workers 
and  with  the  specialized  management.  In  such  an  individual 
business  unit,  specialization  does  not  allow  independence.  It 
compels  interdependence.     It  compels  cooperation. 

Cooperation  by  authority.  —  The  cooperation  within  a 
business  unit,  however,  is  not  guided  entirely  by  the  wishes  of 
the  specialists  themselves.  We  noticed  in  the  last  chapter  that 
specialized  business  units  were  directed  in  their  cooperation  by 
the  self-interest  of  the  individual  enterprisers  who  were  con- 
trolling them.  But  within  each  business  unit,  the  specialists 
do,  to  a  great  degree,  what  they  are  directed  to  do  by  the 
management.  Thus  the  coojieration  within  a  business  unit 
has  often  been  called  cooperation  by  authority.  It  is  so  named 
because  the  authority  of  the  management  directs  and  coor- 
dinates the  specialized  work  of  each  of  those  who  cooperate. 


.158  OUR   ECONOMIC   ORGANIZATION 

Summary.  —  Now  that  we  have  seen  something  of  the  way 
speciahzation  is  used  within  business  units,  and  have  seen  also 
how  each  of  the  business  units  is  itself  a  speciaUst,  it  may  be 
worth  while  to  take  a  summary  view  of  the  whole  matter. 

Let  us  begin  again  with  the  unspecializcd  inhabitant  of  the 
manor  —  unspecialized,  that  is,  except  for  the  priest,  the  miller, 
the  blacksmith,  and  the  carpenter.  The  next  stage  is  the 
differentiation  into  trades  or  crafts,  some  of  which  have  been 
mentioned  above.  In  some  cases  the  market  is  not  wide  enough, 
and  the  demand  for  the  product  not  great  enough  to  justify  any 
further  specialization ;  for  example,  we  have  even  to-day  in 
rural  districts  the  all-around  carpenter ;  in  the  country  town  or 
the  suburb,  we  have  the  physician  with  a  general  practice,  or 
the  lawyer  who  handles  all  kinds  of  cases. 

In  other  cases,  however,  a  large  market  existed  for  certain 
products,  and  trades  became  differentiated  into  processes. 
This  is  further  specialization  and  makes  for  faster  production. 
We  saw  how  the  expanding  market  led  under  the  handicraft 
system  to  the  differentiation  of  the  old  cloth-maker  into  the 
spinner,  the  weaver,  the  dyer,  the  fuller,  the  shearer,  and  others. 
The  smith  became  differentiated  into  the  goldsmith,  the  silver- 
smith, and  the  blacksmith.  Abundant  examples  of  the  same 
process  exist  in  our  society  to-day.  In  our  larger  cities  general 
medical  practice  has  frequently  been  broken  up  into  the  work 
of  the  eye-specialist,  the  ear-specialist,  the  heart-specialist,  and 
others.  The  lawyer  has  become  the  corporation  lawyer,  the 
patent  lawyer,  and  the  claims  attorney.  Such  specialization, 
clearly,  is  only  profitable  where  there  are  many  persons  wanting 
each  kind  of  service.  Such  a  situation  might  well  be  called  a 
wide  market  for  services. 

The  all-round  machinist  has  differentiated  into  quite  a 
range  of  "  specialists."  The  work  of  machinists  might  be  said 
to  be  on  the  very  border  of  the  fourth  stage  of  development 
when  processes  become  split  up  into  their  small  constituent 
operations.  This  stage  is  not  often  reached  in  the  realm  of 
professional  services,  but  it  is  the  typical  state  of  affairs  in 


SPECIALIZATION   WITHIN   BUSINESS   UNITS       159 

machine  industry  under  the  factory  system.  We  have  seen 
iUustrations  of  this  in  the  meat-packing  industries,  for  instance. 
The  whole  animal  has  been  surveyed  and  "  laid  out  like  a  map." 
Put  in  the  form  of  a  diagram  this  discussion  would  run  as 
follows : 


which 

which 

has 

have 

are 

Unspecialized 
Labor 

been 

divided 

into 

Trades 

often 
been 
divided 
into 

Processes 

some- 
times 
divided 
into 

Detailed 
Operations 

Successive  specialization,  ranges  or  series  of  activities.  —The 
differentiation  into  economic  units  and  the  differentiation  of 
trades  and  processes  and  operations  within  units  have  been 
discussed  separately,  but  they  are  not  separated  in  our  actual 
want-gratifying  activities.  Accordingly,  we  should  now  try  to 
get  an  idea  of  how  they  are  interwoven  and  intertangled  in 
ordinary  business  life.  As  an  illustration  think  back  over  the 
preliminary  steps  involved  in  the  making  of  such  a  simple  thing 
as  a  wooden  footstool  in  a  manual  training  class.  Take  first 
of  all  the  wood  which  is  worked  up.  Let  us  go  no  further  back 
than  the  cutting  down  of  a  tree  in  a  forest.  This  is  done  by 
one  specialist.  Later  the  tree  is  sawed  into  rough  boards  at  a 
saw  mill  by  another  group  of  specialists.  It  is  then  bought  by 
a  wholesale  lumber  dealer;  transported  by  another  group  of 
specialists ;  sold  to  a  retail  dealer  who  has  a  mill  for  planing  it 
and  working  it  up  into  more  appropriate  shapes ;  sold  by  the 
retail  dealer  to  the  school ;  transported  through  the  streets 
by  a  draying  concern.  The  material  has  thus  passed  succes- 
sively through  the  hands  of  a  range  or  series  of  specialists,  who 
can  be  classified  from  one  point  of  view  in  terms  of  the  producing 
industries  of  society  (such  as  lumbering,  transporting,  and 
merchandising) ,  and  can  be  classified  from  another  point  of  view 
in  terms  of  trades  or  processes  (such  as  t-eamster,  brakeman, 
telegrapher),  all  of  whom  were  engaged  in  preparing  wood  for 


160 


OUR   ECONOMIC   ORGANIZATION 


'  Large 
billets 


Blooms  ' 


Ore 
Coke 
Lime- 
stone 


Steel- 
making 
iron 

Bessemer  < 

Basic 


Ingots ' 


use.     A  similar  series,  of  course,  exists  for  each  tool  that  was 
used,  for  nails,  glue,  or  other  material. 

r  Wire,  wire  nails, 
Rods  \     and  wire  prod- 

[    ucts 
Merchant  bars 
Angle  bars 
Splice  bars 
Hoops  and  bands 
Merchant  bars 
Light  hoops 
Cotton  ties 
Seamless  tubes 
Sheets,  galvanized,  and 
other  finished 

Tin  plate 


Small 
billets 

Sheet 
and  tin 
plate 
bars 


Black  plate 
for  tinning 


and  tern 
plate 


Rails 

Structural  shapes : 
Beams 

Channels  ]  Bridge  and  other 
Angles       't    fabricating  ma- 
Tees  J     terial 
Zees 

Axles 


Slabs 


Plates; 
Structural 
Boiler 
I,  Skelp     Wrought  pipe  and  tubing 
Castings     Forgings 
Foundry  iron  castings 

Malleable  Bessemer  iron         Castings     Malleable  castings 
Forge  iron     Muck  bar         Merchant  bar  iron  and  other  rolled- 
iron  products 


But  this  is  only  the  beginning.  Every  one  of  the  specialists 
in  the  original  series  or  succession  reaches  back  into  one  or 
more  other  series.  Take,  as  one  example,  the  saw  mill  at 
which  a  board  was  sawed.  It  is  the  end  or  culmination  of  the 
work  of  several  series  of  specialists  reaching  back  into  the 
forest,  the  ore  mine,  and  the  cattle  industry.  It  might  well 
happen  that  the  specialist  in  the  ore  mine  or  in  the  cattle 
industry,  who  took  part  in  the  series  culminating  in  the  saw 
mill,  also  took  part  in  the  series  culminating  in  a  hammer,  or 
the  leather  used  in  upholstei-ing  the  stool.     This  illustration 


SPECIALIZATION   WITHIN   BUSINESS  UNITS        161 

is  typical.  It  shows  how  our  speciaHzation  runs  in  great 
ranges  or  series  which  crisscross  one  another  in  bewildering 
complexity.  Perhaps  the  diagram  ^  on  the  opposite  page, 
sketching  some  of  the  uses  to  which  pig  iron  is  put,  will  serve 
to  conclude  the  discussion  of  these  phases  of  specialization. 

The  great  cooperation.  —  Adam  Smith,  more  than  a  century 
ago,  when  there  was  far  less  specialization  than  exists  now,  per- 
ceived the  cooperating  activities  of  all  the  speciaUsts  and 
described  the  situation  in  these  words.^ 

"The  woolen  coat,  for  example,  which  covers  the  day-labourer,  as 
coarse  and  rough  as  it  may  appear,  is  the  product  of  the  joint  labour 
of  a  great  multitude  of  workmen.  The  shepherd,  the  sorter  of  the 
wool,  the  wool-comber  or  carder,  the  dyer,  the  scribbler,  the  spinner, 
the  weaver,  the  fuller,  the  dresser,  with  many  others,  must  all  join 
their  different  arts  in  order  to  complete  even  this  homely  production. 
How  many  merchants  and  carriers,  besides,  must  have  been  employed 
in  transporting  the  materials  from  some  of  those  workmen  to  others 
who  often  live  in  a  very  distant  part  of  the  country !  How  much  com- 
merce and  navigation  in  particular,  how  many  ship-builders,  sailors, 
sail-makers,  rope-makers,  must  have  been  employed  in  order  to  bring 
together  the  different  drugs  made  use  of  by  the  dyer,  which  often  come 
from  the  remotest  corners  of  the  world !  What  a  variety  of  labour,  too, 
is  necessary  in  order  to  produce  the  tools  of  the  meanest  of  these  work- 
men. To  say  nothing  of  such  complicated  macliines  as  the  ship  of 
the  sailor,  the  mill  of  the  fuller,  or  even  the  loom  of  the  weaver,  let  us 
consider  only  what  a  variety  of  labour  is  requisite  in  order  to  form  that 
very  simple  machine,  the  shears  with  which  the  shepherd  clips  the  wool. 
The  miner,  the  builder  of  the  furnace  for  smelting  the  ore,  the  feller 
of  the  timber,  the  burner  of  the  charcoal  to  be  made  use  of  in  the  smelt- 
ing house,  the  brick-maker,  the  brick-layer,  the  workmen  who  attend 
the  furnace,  the  millwTight,  the  forger,  the  smith,  must  all  of  them 
join  their  different  arts  in  order  to  produce  them.  Were  we  to  ex- 
amine, in  the  same  manner,  all  the  different  parts  of  his  dress  and 
household  furniture,  the  coarse  linen  shirt  which  he  wears  next  his 

1  From  Report  of  the  United  States  Commissioner  of  Corporations  on  the  Steel  Industry, 
Part  III,  1913,  p.  13. 

2  Adapted  from  Adam  Smith,  Wealth  of  Nations,  Book  I,  Ch.  I,  pp.  12-13.  (George 
BeU  &  Sons,  1899.) 


162  OUR  ECONOMIC   ORGANIZATION 

skin,  the  shoes  which  cover  his  feet,  the  bed  which  he  lies  on,  and  all 
the  different  parts  which  compose  it,  the  kitchen  grate  at  which  he 
prepares  his  victuals,  the  coals  which  he  makes  use  of  for  that  purpose, 
dug  from  the  bowels  of  the  earth,  and  brought  to  him  perhaps  by  a 
long  sea  and  a  long  land  carriage,  all  the  other  utensils  or  pewter  plates 
upon  which  he  serves  up  and  divides  his  victuals,  the  different  hands 
employed  in  preparing  his  bread  and  his  beer,  the  glass  window  which 
lets  in  the  heat  and  the  light,  and  keeps  out  the  wind  and  the  rain,  with 
all  the  knowledge  and  art  requisite  for  preparing  that  beautiful  and 
happy  invention,  without  which  these  northern  parts  of  the  world 
could  scarce  have  afforded  a  very  comfortable  habitation,  together 
with  the  tools  of  all  the  different  workmen  employed  in  producing 
those  different  conveniences ;  if  we  examine,  I  say,  all  these  things,  and 
consider  what  a  variety  of  labour  is  employed  about  each  of  them,  we 
shall  be  sensible  that  without  the  assistance  and  cooperation* of  many 
thousands  the  very  meanest  person  in  a  civilized  country  could  not  be 
provided,  even  according  to,  what  we  very  falsely  imagine,  the  easy 
and  simple  manner  in  which  he  is  commonly  accommodated.  Com- 
pared, indeed,  with  the  more  extravagant  luxury  of  the  great,  his  ac- 
commodation must  no  doubt  appear  extremely  simple  and  easy ;  and 
yet  it  may  be  true,  perhaps,  that  the  accommodation  of  an  European 
prince  does  not  always  so  much  exceed  that  of  an  industrious  and  frugal 
peasant  as  the  accommodation  of  the  latter  exceeds  that  of  many  an 
African  king,  the  absolute  master  of  the  lives  and  liberties  of  ten 
thousand  naked  savages." 

Even  this  description  does  not  include  all  of  the  specialists 
who  take  part  in  the  great  cooperation.  Schools  help  to  educate 
the  men  for  their  work.  Inventors  devise  the  machinery 
used.  Physicians  keep  up  the  health  of  workers ;  actors,  musi- 
cians, and  ministers  give  them  recreation  and  encouragement. 
Policemen  and  soldiers  render  protection  and  security.  The 
law  guides  and  regulates  all  of  the  specialists  and  their  oper- 
ations. The  men  who  make  these  laws  and  the  judges  who 
administer  them  are,  therefore,  among  the  cooperators.  Checks 
and  drafts  are  used  in  making  payments,  money  is  borrowed, 
and  thus  the  banker  plays  a  part.  We  cannot  leave  out  the 
agencies  through  which  the  specialists  sell  their  services,  nor 


SPECIALIZATION   WITHIN   BUSINESS   UNITS        163 

those  through  which  the  finished  goods  are  called  to  the  atten- 
tion of  those  who  need  them.  This  brings  in  all  the  news- 
paper and  magazine  workers,  the  writers,  the  circulation  men, 
the  typesetters,  and  press  operators.  All  of  these,  therefore, 
are  among  the  cooperators  that  must  be  counted  in  whether  we 
are  talking  about  a  coat,  a  loaf  of  bread,  a  shoe,  a  song,  a  ser- 
mon, a  hairpin,  or  a  battleship. 

Even  into  the  past  and  future  stretches  the  web  of  economic 
relationships.  We  utilize  the  products  of  those  who  have 
worked  before  us.  Their  inventions,  either  of  mechanical 
agencies  or  of  such  intangible  devices  as  rules  of  law,  morals, 
language,  accounting  or  principles  of  business,  are  useful  to  us. 
Likewise  we  count  upon  the  future.  When  we  write  a  book, 
make  a  brick,  build  a  house,  or  dig  a  well,  it  is  the  demand 
of  the  future  as  much  as  of  the  present  that  makes  our  work 
valuable.  Thus  are  we  interdependent  with  those  who  follow 
us.     We  are  cooperators  with  generations  yet  unborn. 

PROBLEMS 

1.  Re\dew  Study  II  and  indicate  the  various  ways  in  which  we 
might  have  secured  a  supply  of  wealth  and  services  if  we  had  been 
shipwrecked  on  an  island. 

2.  Explain  and  illustrate  specialization  by  industries ;  processes ; 
operations;  series;  localities. 

3.  Was  there  specialization  in  the  manorial  economy?  Would 
there  be  specialization  under  communism  ? 

4.  Can  you  think  of  any  one  to-day  who  engages  in  every  kind  of 
work  necessary  to  produce  the  commodities  which  he  uses? 

5.  Take  the  classification  of  industries  on  page  128  and  tell  in  what 
class  or  group  each  of  ten  of  your  acquaintances  works.  Are  they 
nearly  all  in  one  class?  If  so,  how  do  you  account  for  this  concentra- 
tion?    Are  they  widely  scattered?     If  so,  why? 

6.  Subdivide  further  the  classification  of  industries  on  page  128. 
For  example,  mention  twelve  kinds  of  manufacturing. 

7.  Just  why  is  a  wide  or  large  market  a  prerequisite  of  specializa- 
tion? 


164  OUR  ECONOMIC   ORGANIZATION 

8.  "The  specialists  in  a  modern  factory  are  separate,  individual, 
unrelated  units.  They  know  little  of  the  work  of  one  another ;  they 
care  less.  There  is  no  cooperation;  there  can  be  no  sense  of  unity 
under  such  a  system."  Pick  out  the  parts  of  this  statement  with 
which  you  agree  and  those  with  which  you  disagree  and  be  ready  to 
defend  your  position. 

9.  Talk  with  some  one  who  has  been  working  in  a  bank  or  an  office 
or  a  factory  for  a  year  or  two,  to  see  whether  he  thinks  he  is  progressing 
in  general  knowledge  of  the  business.  What  is  to  be  said  for  and 
against  the  statement  that  one  learns  a  business  by  working  at  it  ? 

10.  Why  should  the  factories  in  which  shoes  are  made  exhibit  a 
higher  degree  of  specialization  than  that  shown  in  many  other  fac- 
tories? 

11.  Make  a  list  of  speciahzed  tasks.  What  persons  perform  other 
specialized  tasks  that  are  necessary  either  to  begin  or  to  complete  the 
process  partly  carried  on  in  the  tasks  in  your  list  ? 

12.  Have  you  ever  known  of  a  strike?  Is  there  any  way  in  which  a 
strike  in  some  distant  city  might  affect  you?  Would  one  on  steam- 
ship or  railroad  Unes  affect  you?  In  what  industries  would  a  strike 
be  of  greatest  significance  to  the  whole  country? 

13.  What  is  meant  by  sa5dng  that  the  public  is  party  to  every  strike  ? 

14.  Try  to  trace  one  of  the  ordinary  commodities  of  life,  Uke  a  shoe 
or  a  loaf  of  bread,  tlu'ough  all  the  different  persons  or  agencies  who 
cooperated  in  producing  it. 

15.  Are  the  grocers'  delivery  men  among  the  cooperators  who  pro- 
vide us  a  loaf  of  bread  ?  Are  the  men  who  work  at  paving  the  streets 
among  them?    Are  the  people  who  pay  taxes? 

16.  Make  a  list  of  some  of  the  imports  which  you  use. 

17.  International  trade  helps  to  gratify  our  wants  in  two  ways.  It 
enables  us  to  get  some  commodities  we  could  not  otherwise  get  and  it 
enables  us  to  get  others  more  cheaply.     Give  illustrations. 

18.  Bananas  can  be  raised  in  hothouses  in  Canada.  Would  Canada 
be  wise  to  get  her  banana  supply  in  this  way? 

19.  What  are  the  chief  centers  of  the  packing  industry?  How  did 
these  industries  happen  to  locate  at  these  centers  ? 

20.  Capital  is  specialized  as  frequently  as  labor.  Give  a  list  of 
examples  of  specialized  capital. 


SPECIALIZATION   WITHIN   BUSINESS  UNITS        165 

21.  Nowadays  one  machine  completes  the  process  of  pin-making 
which  in  Adam  Smith's  day  occupied  many  men.  Has  there  been  an 
increase  or  decrease  in  specialization  ? 

22.  The  railroad  is  a  specialized  capital  good.  What  specialists 
were  displaced  by  its  coming  in  ?  Wliat  new  specialists  came  into  be- 
ing? Did  its  introduction  stimulate  the  inorcellement  or  splitting  up 
of  the  machinist  trade  into  specialists  ?    If  so,  just  how  ? 

23.  It  is  sometimes  said  that  specialization  is  partly  responsible  for 
the  increased  participation  of  women  in  work  outside  the  home.  Can 
you  see  why  this  statement  is  true? 

24.  There  are  many  cases  in  modern  times  where  a  commodity  is 
produced  sometimes  in  a  factory,  sometimes  in  the  home.  Why 
should  this  be  so  ? 

25.  What  are  the  advantages  of  homemade  goods  over  factory 
goods  ?     Give  examples. 

26.  What  are  the  advantages  of  factory  goods  over  homemade 
goods  ?    Give  examples. 

27.  Is  the  entrance  of  women  into  department  stores  and  offices 
"an  effect  of  macliine  industry  upon  the  work  of  women"?  If  so, 
why?  Wlien  the  factory  takes  over  the  making  of  something  formerly 
made  in  the  home  does  it  create  leisure  in  the  home  ? 

28.  "Women  to-day  must  be  specialists  in  buying."     Explain. 

29.  Even  management  has  been  specialized.  Compare  the  duties 
of  the  old-fashioned  foreman  ^^^th  those  of  the  functional  foreman. 
Why  is  it  sensible  to  call  this  new  type  of  foreman  a  functional 
foreman  ? 

30.  Work  out  an  organization  chart  of  the  public  school  system  of 
your  city.     Does  it  reveal  specialization  of  tasks? 

31.  Is  the  teaching  work  in  your  school  specialized?  Is  the  dis- 
cipline in  your  school  a  function  of  each  teacher  or  is  it  a  special  func- 
tion of  the  principal?     Is  it  a  function  of  the  students? 

32.  "  Specialization  can  occur  only  in  a  group  or  society."     Why? 

33.  Why  do  we  not  have  small  forges  in  our  chimney  corners  nowa- 
days so  that  we  might  spend  our  evenings  usefully  in  making  nails,  as 
was  common  in  Colonial  days  ? 

34.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 


166  OUR  ECONOMIC   ORGANIZATION 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.   373-374.     Selec- 
tions 141-146. 

Bureau  of  Education,  Lessons  in  Community  and  National  Life: 
Series  A,  Lesson  A-3 :  Lyon,  "  The  Cooperation  of  Specialists 

in  Modern  Society." 
Series  B,  Lesson  B-2:  Tryon,  "The  Varied  Occupations  of  a 
Colonial  Farm." 
Lesson  B-3 :   Van   Hoesen,   "  A  Cotton   Factory    and    the 
Workers." 


STUDY  XI 
TERRITORIAL  SPECIALIZATION 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  that  there  is  a  specialization  of  territories. 

2.  To   determine   some  of  the  factors  that  produce  this  territorial 

specialization. 

3.  To  consider  advantages  and  disadvantages  of  territorial  specializa- 

tion. 

The  localization  of  the  primary  industries.  —  In  the  pre- 
ceding lessons  we  saw  specialization  of  business  units  and 
the  specialization  within  these  units.  But  territories  specialize 
as  truly  as  do  individuals  or  businesses.  In  this  study  we  shall 
examine  the  factors  which  cause  this  territorial  specialization. 

The  industries  which  we  call  primary,  such  as  hunting,  fish- 
ing, grazing,  lumbering,  mining,  agriculture,  and  forestry  cannot 
of  course  be  separated  from  the  natural  resources  on  which  they 
depend.  It  so  happens  that  these  resources  are  much  more 
abundant  in  some  places  than  in  others,  with  the  natural  result 
that  these  industries  concentrate  in  the  more  productive 
regions.  Where  these  regions  will  be  depends  first  of  all  upon 
climatic  considerations.  The  flora  and  fauna  of  the  earth  are 
grouped  in  great  climatic  zones.  For  example,  the  zones  of 
vegetation  which  determine  in  what  broad  belts  their  dependent 
industries  shall  lie  are  as  follows : 

"The  boreal  zone  has  its  special  vegetation  of  mosses,  lichens, 
saxifrages,  berries,  oats,  barley,  and  rye ;  the  temperate  zone  its  peas, 
beans,  roots,  hops,  oats,  barley,  rye,  and  wheat ;  this  zone,  character- 
ised by  its  extent  of  pastures,  hop  gardens,  and  barley  fields,  has  also 
a  distinctive  title  in  the  'beer  and  butter  region.'  The  warm  temper- 
ate zone,  or  region  of  'wine  and  oil,'  is  characterised  by  the  growth  of 

1G7 


168  OUR  ECONOMIC   ORGANIZATION 

the  vine,  olive,  orange,  lemon,  citron,  pomegranate,  tea,  wheat,  maize 
and  rice;  the  sub-tropical  zone,  by  dates,  figs,  the  vine,  sugar-cane, 
wheat,  and  maize;  the  tropical  zone  is  characterised  by  coffee,  cocoa- 
nut,  cocoa,  sago,  palm,  figs,  arrow-root,  and  spices ;  and  the  equatorial 
by  bananas,  plantains,  cocoa-nut,  etc."  ^ 

Climate  determines  the  zone,  but  geographical  and  geological 
conditions  determine  what  shall  be  the  location  within  the  zone 
of  the  primary  industries  which  are  dependent  upon  flora  and 
fauna.  They  also  determine  the  location  without  much  refer- 
ence to  climate  (aside  from  that  of  preceding  geological  eras) 
of  our  primary  industries  dependent  upon  mineral  resources. 
For  example,  the  climate,  together  with  conditions  of  water 
supply  and  the  character  of  the  soil  and  sub-soil,  explain  the 
presence  of  agricultural  industries  in  our  great  Middle  West 
and  their  absence  in  the  desert  regions  of  Arizona  and  New 
Mexico ;  the  character  and  extent  of  the  mineral  resources 
concerned  account  for  the  mining  industries  of  Pennsylvania, 
of  northern  Michigan,  and  of  Chile ;  similarly,  geographical 
position  with  particular  reference  to  accessibility  to  trade  routes 
and  the  contour  of  the  land  plays  its  part  in  determining  the 
fitness  of  localities  for  particular  lines  of  primary  industry. 

The  localization  of  manufacturing  industries.  —  Manu- 
facturing and  commercial  industries  show  a  concentration  in 
particular  localities  quite  like  that  shown  by  the  primary 
industries.  Our  manufactures  are  largely  concentrated  in  the 
northern  and  eastern  parts  of  the  country.  It  is  in  these  parts 
that  a  dense  population  provides  both  an  adequate  supply  of 
labor  and  a  good  consuming  market.  Here,  too,  a  well- 
developed  transportation  system  makes  readily  accessible  both 
raw  materials  and  markets.  Water  power  and  fuel  for  steam 
exist  in  the  quantities  necessary  for  supplying  motive  force,  and 
several  generations  of  industrial  life  have  caused  the  develop- 
ment of  industrial  traditions  and  a  satisfactory  business  environ- 
ment. 

'  From  Yeats,  The  Golden  Gates  of  Trade,  p.  12,  quoted  by  Hobson  in  The  Evolution  of 
Modern  Capitalism. 


TERRITORIAL   SPECIALIZATION 


169 


The  concentration  of  "  manufactures  in  general  "  is  only 
one  of  the  important  facts.  Within  this  great  manufacturing 
region,    particular    industries    have    become    concentrated    in 


Value  of  Products  of  Manufacturing  Industries  by  States,   1909 
Notice  the  concentration  north  of  the  Ohio  and  Potomac  rivers. 

certain  localities.  The  following  table  ^  shows  some  of  the  more 
conspicuous  instances  of  this  concentration.  It  is  a  list  of  those 
industries  in  which  more  than  two  fifths  of  the  total  production 
of  our  country  takes  place  in  a  single  state.  It  is  interesting 
to  note  how  often  certain  states  are  represented. 

Local  Concentration  of  Certain  Industries 


Industry 


Per  Cent  of 
Total  Value 
OP  Products 
FOR  United 
States,  1909 


Collar  and  cuffs 

Grindstones 

Artificial    flowers    and    feathers    and 

plumes 

Peanuts,    grading,    roasting,    cleaning, 

and  shelling 


New  York 
Ohio 

New  York 

Virginia 


92.3 

88.8 

88.2 
81.5 


I  Thirteenth  Ceusus  of  the  United  States,  1910,  ^'ol.  VIIJ,  pp.  127-128. 


170 


OUR  ECONOMIC   ORGANIZATION 


Local  Concentration  op  Certain  Industries— Conftw-wed 


Industry 


Per  Cent  of 
Total  Value 

OF  Products 
FOR  United 
States,  1909 


Plated  ware  (not  including  silversmith- 
ing  and  silverware) 

Fur  goods 

Clothing,  women's 

Hair  work 

Liquors,  vinous 

Pens,  fountain,  stylographic,  and  gold  . 

Needles,  pins,  and  hooks  and  eyes   .     . 

Gloves  and  mittens,  leather     .... 

Millinery  and  lace  goods 

Pipes,  tobacco 

Firearms  and  ammunition 

Rice,  cleaning  and  polishing    .... 

Clocks 

Coke 

Iron  and  steel,  steel  works,  and  rolling 
mills 

Turpentine  and  rosin 

Furnishing  goods,  men's  (not  including 
collars  and  cuffs  nor  suspenders,  gar- 
ters, and  elastic  woven  goods)  .     .     . 

Clothing,  men's,  including  shirts  .     .     . 

Boots  and  shoes,  including  cut  stock  and 
findings 

Ink,  printing 

Brass  and  bronze  products 

Iron  and  steel,  blast  furnaces  .... 


Connecticut 
New  York 
New  York 
New  York 
California 
New  York 
Connecticut 
New  York 
New  York 
New  York 
Connecticut 
Louisiana 
Connecticut 
Pennsylvania 

Pennsylvania 
Florida 


New  York 
New  York 

Massachusetts 
New  York 
Connecticut 
Pennsylvania 


77.4 
73.8 
70.8 
70.1 
68.1 
67.9 
63.3 
60.7 
60.7 
60.5 
58.6 
56.0 
55.7 
54.1 

50.8 
47.2 


46.9 
46.8 

46.1 
45.8 
44.6 
43.1 


Some  factors  determining  the  location  of  manufacturing 
plants.  —  Tho  simplest  way  to  see  why  manufacturing  in- 
dustries have  become  localized  is  to  study  the  factors  which 
determine  where  a  given  manufacturing  plant  may  wisely 
locate.  These  factors  vary  in  their  relative  importance 
from  industry  to  industry  and  from  case  to  case.  But  taken 
as  a  whole  they  help  us  to  understand  both  the  present  local- 


TERRITORIAL   SPECIALIZATION 


171 


ization  of   industry  and    the   factors   making   for   change   of 
locality. 

One  of  the  most  important  factors  in  plant  location  is  that 
of  accessibility  to  raw  materials.  Here  accessibility  usually 
means  proximity,  for  raw  materials  are  generally  bulky  and 
expensive  to  transport,  so  that  the  industry  which  works  them 
up  usually  settles  near  at  hand.     This  is  especially  true  in  the 


7  — I      o      r         ^— .' 


•  M.OOO.MO 

9  $3,0011,000  to  (4,000,000 

9  t^.oao.ooo  to  (3,000,000 

O  11,000,000  to  12,000,000 

O  Less  tbaa  (1,000,000 


Value  of  Lumber  Products  by  States,   1909 
How  do  you  account  for  the  wide  distribution? 

so-called  elaborative  industries  which  perform  the  first  pro- 
cesses in  the  working  up  of  the  materials  furnished  by  the  pri- 
mary industries.  The  packing  industry  settled  near  the  stock- 
raising  region  of  the  central  west ;  the  coal  mines  and  ore  fields 
of  eastern  Pennsylvania  made  that  district  a  specialist  in  iron 
and  steel  production. 

Proximity  to  raw  materials  is  especially  important  under  the 
following  conditions.  (1)  When  transportation  facilities  have 
been  but  poorly  developed :  you  may  remember  that  Shays's 
Rebellion  was  connected  with  the  need  the  farmers  felt,  in  that 
day  of  poor  transportation  facilities,  for  being  unhampered  in 
turning  their  grain  into  licjuor,  since  it  could  be  more  readily 


172  OUR  ECONOMIC   ORGANIZATION 

transported  in  the  more  valuable  form.  (2)  When  the  raw 
material  concerned  is  very  heavy  and  bulky  in  proportion  to  its 
value  so  that  the  cost  of  transporting  it  would  be  a  very  great 
part  of  the  total  cost  of  the  article  to  be  made.  For  example, 
the  making  of  bricks  is  almost  certain  to  be  located  near  the 
beds  of  clay.  (3)  The  point  just  mentioned  is  particularly  true 
when  the  raw  material  shrinks  greatly  in  volume  or  weight  or 
has  only  a  small  portion  used  in  the  process  of  manufacture. 
Under  such  circumstances  it  would  obviously  pay  to  manufac- 
ture near  the  raw  materials  and  transport  only  the  much  smaller 
and  lighter  and  more  valuable  finished  product.  (4)  When 
the  materials  concerned  are  perishable  in  nature  so  that  they 
must  be  utilized  quickly.  "  Neither  cane  nor  raw  juice  can 
be  carried  far  without  spoiling.  For  a  similar  reason  salmon 
canneries  will  cling  to  the  banks  of  the  Columbia,  while  fruit 
and  vegetable  canneries  will  stick  close  to  Maryland  orchards 
and  California  ranches."  ^ 

Another  strong  influence  in  the  location  of  many  manufac- 
turing industries  is  cheap  power  and  fuel.  Since  modern  in- 
dustry generally  uses  power-driven  machines,  a  location  near 
the  source  of  power  is  frequently  attractive.  This  was  particu- 
larly true  in  the  days  when  water  power  was  more  important 
than  it  is  to-day.  For  example,  Fall  River,  Lowell,  and  Man- 
chester in  New  England  became  centers  of  manufacture  partly 
because  of  the  availability  of  water  power,  which  of  course  had 
to  be  used  right  on  the  spot  if  it  was  to  be  used  at  all.  Nowa- 
days water  power  can  be  transformed  into  electricity  and  trans- 
ported many  miles.  Coal,  too,  when  used  for  power  alone, 
can  go  hundreds  of  miles,  since  the  cost  of  transporting  the  small 
amount  of  fuel  which  would  be  needed  for  power  is  not  large. 
In  other  words,  to-day  industries  need  not  necessarily  settle 
close  to  sources  of  power.  When  much  fuel  is  needed  to  develop 
heat,  however,  it  is  a  very  different  story.  The  metallurgical 
and  refining  industries,  the  manufacture  of  glass  and  pottery, 

'  E.  A.  Ross,  The  Location  of  Industries,  Quarterly  Journal  of  Ecouomics,  X  (1895- 
1896),  p.  252. 


TERRITORIAL  SPECIALIZATION  173 

and  the  smelting  and  forging  of  iron,  tend  to  be  near  the  sources 
of  fuel  supply. 

Accessibility  to  markets  is  a  third  important  influence.  We 
have  often  seen  that  modern  specialized,  large-scale  production 
could  not  exist  without  large  markets  being  accessible.  Acces- 
sibility does  not  here  necessarily  mean  proximit}^,  for  our  modern 
efficient  transportation  systems  enable  us  to  transport  finished 
products,  which  are  usually  goods  of  high  value  in  proportion 
to  their  bulk,  quite  considerable  distances.  Some  industries, 
however,  must  settle  near  the  consumer.  "  Confectionaries, 
bakeries,  and  market  gardens  must  be  near  him  to  avoid  de- 
terioration of  product.  Repair  work,  tailoring,  and  millinery 
settle  near  him.  Daily  newspapers  are  published  where  the 
readers  dwell  in  order  to  secure  promptitude.  The  bulk  and 
waste  of  artificial  ice  in  transportation,  as  well  as  the  bulk  of 
cooper's  products  compel  them  to  be  made  where  wanted."  ^ 

A  fourth  influence  is  the  presence  of  labor  in  adequate  amounts 
and  in  appropriate  classifications.  Speaking  generally,  satis- 
factory labor  power  will  be  found  in  a  dense  population,  such 
as  the  modern  large  city,  for  here  the  supply  is  very  great  and 
different  grades  of  skill  are  likely  to  be  found.  Since  the  dense 
population  means  also  a  large  market,  it  is  easy  to  see  why  manu- 
facturers show  such  a  tendency  to  concentrate  in  metropolitan 
centers.  Sometimes,  however,  it  is  advantageous  for  a  plant 
to  locate  in  some  smaller  community  where  it  can  employ  some 
unused  part  of  the  labor  supply.  "  In  a  factory  town  where 
the  labor  of  one  sex  is  exclusively  employed,  other  industries 
will  frequently  spring  up  to  utilize  the  labor  of  the  opposite  sex. 
Thus  one  of  the  earliest  factories  in  the  city  of  New  Britain, 
Connecticut,  was  devoted  to  the  manufacture  of  carpenter's 
rules  and  levels,  and  employed  male  labor  alone ;  it  was  not 
long  before  a  cotton  factory,  in  which  the  cheap  and  abundant 
labor  of  women  and  children  could  be  used  to  advantage,  was 
planted  in  the  town.  A  similar  tendency  has  caused  the  loca- 
tion of  textile  factories  in  mining,  metal,  and  machine  towns  of 

'  E.  A.  Ross,  op.  cU, 


174  OUR   ECONOMIC   ORGANIZATION 

England."  ^  Sometimes,  also,  the  magnitude  of  the  enterprise 
justifies  its  promoters  in  settling  outside  a  large  city  and  building 
up  an  independent  supply  of  labor.  The  building  of  the  city 
of  Gary  on  what  was  formerly  waste  sand  dunes  is  a  good  case 
in  point. 

Another  important  influence  is  the  momentum  of  an  early 
start  which  frequently  leads  to  growth  through  imitation  and 
through  development  of  special  services.  It  must  be  admitted 
that  many  early  plant  locations  were  largely  accidental,  for  in 
the  early  days  of  the  factory  system  people  had  not  yet  learned 
how  to  locate  plants  scientifically.  When  a  plant  thus  acciden- 
tally located  did  a  profitable  business,  it  would  attract  attention 
and  others  intending  to  engage  in  the  same  line  of  manufacture 
would  settle  at  the  same  place.  This  was  not  a  logical  act 
for  some  other  location  might  have  been  even  more  advanta- 
geous; it  was  mere  imitation.  Presently  quite  a  few  plants  of 
this  same  industry  were  grouped  together  and  then  came  re- 
lated industries,  such  as  those  which  repaired  the  machinery  of 
the  original  industries ;  furnished  them  certain  raw  materials ; 
utilized  certain  of  their  wastes ;  or  elaborated  certain  of  their 
products.  In  such  a  community  special  services  and  special 
advantages  tend  to  develop,  such  as  a  specialized  market  in 
which  buyers  habitually  meet.  A  labor  supply  possessing  a 
high  degree  of  specialized  skill  grows  up.  Societies  or  associ- 
ations for  the  study  of  common  problems  develop ;  and  even  a 
sort  of  division  of  labor  among  employers,  in  that  each  one's 
plant  may  be  devoted  to  a  single  process,  comes  into  existence. 
"  Special  transport  facilities,  and  the  provision  of  commer- 
cial intelligence  can  be  arranged  for  a  localized  industry.  Scien- 
tists, lawyers,  accountants  find  it  worth  their  while  to  specialize 
in  the  problems  peculiar  to  the  local  industry.  Insurance 
can  be  effected  cheaper.  Probably  the  use  of  credit  can  be 
obtained  cheaper  where  risks  and  conditions  are  so  well  known 
as  they  are  in  a  modern  specialized  locality."  ^ 

•  Weber,  Growth  of  Cities,  Columbia  Studies  in  History,  Economics,  and  Public  Law,  pp. 
208-9. 

■  Clay,  Ecoiiumica  f:>r  tlic  General  Reader,  American  edition,  p.  29. 


TERRITORIAL   SPECIALIZATION  175 

New  England  furnishes  a  good  illustration  of  the  significance 
of  the  momentum  of  an  early  start.  The  development  of  the 
shoe-making  industry  in  Lynn  is  typical.  John  Dagyr,  a  Welch 
shoemaker,  settled  in  Lynn  in  1750  and  the  later  history  of  the 
town  may  almost  be  said  to  have  been  summed  up  in  the  preced- 
ing paragraph.  And  not  merely  the  later  history  of  this  town, 
but-  of  New  England  as  well.  New  England  to-day  remains 
a  manufacturing  center,  not  primarily  because  of  cheap  fuel, 
cheap  power,  cheap  raw  materials,  or  accessibihty  to  markets, 
but  because  her  early  start  has  given  her  special  facilities  and 
special  advantages.  Take,  for  example,  the  way  in  which 
railroad  rates  favor  New  England.  Notwithstanding  the 
greater  distance  involved,  the  rates  on  food  supplies  from  west 
of  New  York  are  roughly  the  same  to  all  points  in  New  England 
and  are  not  materiall}'  higher  than  they  are  to  the  manufactur- 
ing districts  of  New  York  and  Pennsylvania,  while  the  rates  on 
manufactured  goods  from  New  England  to  the  great  central 
west  have  been  made  such  as  to  enable  the  New  England  manu- 
facturer to  compete  with  the  New  Yorker  and  the  Pennsyl- 
vanian.  The  railroad  lines  do  this  so  that  manufacturers  may 
continue  their  factories  in  New  England  and  thus  provide  the 
roads  with  traffic .  It  is  an  interesting  illustration  of  the  way 
the  momentum  of  an  early  start  may  offset  other  factors  con- 
nected with  plant  location. 

Finally,  among  the  major  influences  determining  the  location 
of  manufacturing  plants  must  be  mentioned  social  control  and 
social  environment.  The  influence  of  this  factor  has  already 
been  seen  in  the  case  of  locations  due  to  imitation.  It  accounts 
also  in  large  part  for  industries  remaining  in  a  given  location, 
through  habit  and  inertia,  long  after  it  ceases  to  be  economically 
wise  to  remain.  Then,  too,  industry  naturally  prefers  to  settle 
in  places  where  the  political  and  social  environments  are  favor- 
able ;  where  property  is  secure ;  where  peace  and  order  permit 
business  transactions  to  proceed  unhampered ;  where  corpora- 
tion laws  and  other  rules  governing  business  are  satisfactory; 
where  public  opinion  is  not  hostile  to  such  enterprise;  where 


176 


OUR  ECONOMIC  ORGANIZATION 


the  relations  between  labor  and  capital  are  not  strained  ;  where 
schools,  churches,  and  amusements  exist  in  sufficient  quantity 
and  quality  to  justify  maintenance  of  homes  by  workers.  Any 
business  manager  is  naturally  much  influenced  by  such  con- 
ditions. 

As  a  summary  of  this  discussion  of  the  factors  determining 
the  location  of  manufacturing  plants  notice  the  following  table 


! r-^v^. 


^ 


T-C 


J     i- '         o  *       V        o.J-r —    3 

i  ir-z- -.  A- X      Nt    "sr 


•  D.OOO.OM 

9  12^0.000  to  n.ooe.ooa 

a  n.socooo  10  n,2u,<iM 

O  rM.ooo  10  ti.soo.ooo 

O  Less  Ibaa  fJiO.on 


Value  of  Automobile  Products  by  States,   1909 

Do  the  preceding  pages  enable  you  to  explain  this  concentration  of  the 
automobile  industry  in  so  small  an  area? 

furnished  by  an  engineer  who  acts  as  an  adviser  in  such  matters. 
You  will  notice  that  he  has  assigned  certain  weights  or  degrees 
of  importance  on  a  scale  of  ten,  to  the  factors  he  enumerates. 
In  doing  this  he  obviously  has  some  specific  case  in  mind.  The 
weights  would  naturally  vary  according  to  the  type  of  industry 
concerned. 

Weighing  or  weighting  the  importance  of  different  factors} 
1.   Weight,  1|;    proximity  of  raw  material  market,  including  rail 
service,  water  service,  and  supply. 

'  Harold  V.  Goes,  The  Rihabilitation  of  Existinn  Plants  as  a  Factor  in  Production  Costs. 


TERRITORIAL   SPECIALIZATION  177 

2.  Weight,  1^;  proximity  to  consumer's  market,  including  large 
cities,  rail  service,  water  service,  advertising  value  or  influence  of  plant 
and  competitors. 

3.  Weight,  2j;  labor  market,  including  character  of  labor  and 
suppl}',  percentage  of  unemployed  females  (women  and  girls),  per- 
centage of  unemployed  boys  (above  legal  factory  a^e),  price  of  labor, 
cost  of  living,  specialization  of  labor,  influence  of  climate  and  associa- 
tions or  unions. 

4.  Weight,  1 ;  power,  including  price  and  character  of  fuel  (coal, 
gas,  oil),  hydro-electric  or  water  power,  and  central  station. 

5.  Weight,  J ;  influence  of  climate  on  labor  and  on  product. 

6.  Weight,  I;  utilization  of  waste  products,  including  disposal  of 
waste  products,  market  value  of  waste  products,  and  cost  of  disposing 
of  same,  if  unmarketable. 

7.  Weight,  J ;  perishability  of  raw  materials  and  of  finished  product. 

8.  Weight,  I;  freight  rates  on  raw  materials  and  on  finished 
products. 

9.  Weight,  I ;  legislation,  regulation,  or  ordinances,  including  state 
legislation  (corporation  laws,  taxes,  employers'  liability)  and  municipal, 
town,  or  country  regulations  or  ordinances  (taxes,  factory  building 
inspection) . 

10.  Weight,  1 ;  banking  facilities,  including  size  of,  handling  pay 
rolls,  etc.,  credit,  and  general  utility. 

11.  Weight,  I;  site  of  real  estate  (city,  suburb,  country),  including 
price  of,  character  of  soil,  cost  of  preparing  site,  foundations,  and 
floods. 

12.  Weight,  I ;  building  materials,  including  local  sand,  gravel,  etc., 
crushed  stone,  brick,  timber,  steel,  and  cement. 

Some  factors  determining  the  location  of  commercial  enter- 
prises. —  Production,  including  commerce,  is  undertaken  to 
gratify  wants  of  consumers,  and  has  the  task  of  distributing  goods 
to  points  of  need.  The  tremendous  variety  and  mass  of  the 
products  of  modern  specialized  industry  flows  in  great  streams  to 
places  of  distribution.  The  greatest  of  these  distributing  cen- 
ters is  the  modern  large  city,  for  here  are  served  not  only  its 
own  population  but  the  population  of  its  supporting  territory 
or  "  hinterland."  Distributing  centers  range  in  importance 
from  such  great  seats  of  commercial  activity  as  New  York  or 


178  OUR  ECONOMIC   ORGANIZATION 

Chicago,  down  to  the  country  store  at  the  cross  roads  or  in  the 
mountain  pass  between  two  valleys,  and  always  their  location 
is  to  be  explained  by  the  fact  that  it  is  a  favorable  one  to  reach 
some  group  of  people,  large  or  small.  Because  of  the  great 
importance  of  transportation  in  reaching  the  consumer  these 
distributing  centers  are  always  on  some  transportation  route 
and  usually  at  its  terminus,  where  occurs  the  many  tasks  con- 
nected with  breaking  up  the  stream  of  modern  products;  re- 
sorting them,  repacking  them,  arranging  them  into  the  qualities 
and  quantities  which  will  please  the  individual  consumer, 
storing  them  against  future  needs,  etc.  "  The  great  seaport 
exists  because  it  is  a  place  for  the  breaking  of  cargo  for  ocean 
ships  just  as  the  country  store  exists  because  the  boxes  and 
wagon  loads  of  miscellaneous  supphes  must  there  be  divided  up 
into  numerous  small  packages  for  the  individual  consumer."  ^ 

If  once  such  a  distributing  center  has  been  started  at  a  point 
where  conditions  justify  its  growth  the  significance  of  the  mo- 
mentum of  an  early  start  is  again  revealed.  Special  facihties 
and  services  develop ;  functional  middlemen  (see  p.  144)  gather 
to  do  their  tasks ;  imitation  draws  in  an  ever-increasing  number 
of  enterprises ;  certain  primary  industries,  such  as  dairying 
and  truck  gardening,  gather  about  to  serve  the  population  and 
are  themselves  served  in  turn ;  manufacturers  enter,  tempted 
by  the  proximity  to  the  market,  the  transportation  facihties, 
and  the  ever-growing  labor  supply.  As  the  commercial  com- 
munity attracts  primary  and  manufacturing  industries,  so 
the  coming  of  these  industries  enlarges  the  field  of  work  of  the 
commercial  distributors  who  serve  them,  both  through  selling 
their  products  and  through  providing  goods  for  the  wants  of 
the  agricultural  and  manufacturing  population.  "  To  him  that 
hath  it  shall  be  given  "  as  regards  urban  population  to  hmits 
not  yet  clearly  known. 

Specialization  within  districts.  —  In  much  of  the  preceding 
discussion  we  have  been  concerned  with  territorial  specializa.- 
tion  between  relatively  large  areas.     It  is  to  be  noticed,  however, 

'  J.  Rusaell  Smith,  Industrial  and  Commercial  Geography,  pp.  840-875. 


TERRITORIAL   SPECIALIZATION  179 

that  the  factors  which  have  caused  this  speciahzation  have 
operated  also  to  cause  speciahzation  within  these  areas  and 
even  to  cause  it  within  towns  or  on  particular  streets. 

The  English  cotton  manufacture  is  one  of  the  most  interest- 
ing cases  of  highly  developed  specialization  within  a  manufac- 
turing district.  In  something  over  a  century  this  industry  has 
increased  over  a  hundredfold,  but  the  area  it  occupies  is  not  as 
large  as  it  was  in  its  early  days,  —  the  real  producing  center  of 
to-day  being  about  twenty-five  square  miles  in  the  English 
county,  Lancashire.  Even  within  this  restricted  area  great 
specialization  has  occurred. 

"Southern  Lancashire  with  the  adjoining  parts  of  Cheshire  and 
Derbyshire,  is  the  spinning  and  doubling  district.  In  Oldham  and 
its  neighborhood,  moreover,  only  coarse  and  medium  counts  are 
spim,  whereas  Bolton  and  Manchester  are  the  centers  for  the  spinning 
of  fine  yarn.  Stockport  is  preeminently  the  seat  of  doubling  mills. 
And  in  northern  and  eastern  Lancashire  weaving  predominates ;  many 
of  the  spinning  mills  formerly  located  there  have  migrated  southward. 
Within  the  weaving  district  there  is  a  similar  local  segregation,  —  the 
manufacture  of  fancy  cloth  in  Preston  and  Chorley,  colored  fabrics  in 
Colne  and  Nelson,  heavily  sized  shirtings  in  Blackburn  and  Bury, 
T-cloths  and  domestics  in  Bacup,  printers  (print  cloth)  in  Blackburn, 
and  India  and  China  shirtings  in  Darwen.  In  fact  almost  every  town 
has  its  specialty."  ^ 

Such  specialization  within  a  district  is  striking  evidence  of  the 
importance  of  localization  in  bringing  about  special  facilities 
and  special  services.  Obviously  specialization  can  be  carried 
to  such  great  lengths  only  when  the  commodity  has  high  value 
in  proportion  to  its  bulk  so  that  cheap  transportation  costs 
make  the  market  world  wide. 

The  principles  determining  specialization  of  larger  areas  also 
determine  territorial  specialization  within  a  town  or  city. 
(1)  The  influence  of  natural  conditions  is  often  quite  prominent. 
In  a  city  with  a  rough  and  hilly  location  one  almost  always  finds 
the  streets  following  the  ravines  where  it  is  easiest  to  build  roads 

'  M.  T.  Copeland,  The  Cotton  Manufacturing  Industry  in  the  United  StateK,  p.  277. 


180  OUR   ECONOMIC   ORGANIZATION 

and  where  transportation  will  not  be  hampered  by  hills.  On  the 
hills  or  bluffs  are  the  residence  districts,  while  in  the  flats,  which 
often  lie  along  a  river,  are  the  business  section  and  the  factory 
district.  (2)  The  grouping  together  in  small  areas  of  many 
units  of  the  same  business  in  order  that  each  may  be  convenient 
to  customers,  and  that  all  may  have  access  to  the  special  serv- 
ice and  facilities  which  such  grouping  affords  is  very  common. 

"The  steamship  agents  and  brokers  of  London,  Liverpool,  Pliila- 
delpliia,  and  New  York  are  all  collected  into  small  districts  of  their 
respective  cities  through  which  one  can  walk  in  a  few  minutes.  The 
London  wool  brokers  have  their  still  more  restricted  locality  and  two 
or  three  small  streets  are  the  headquarters  for  the  general  produce 
brokers.  The  same  is  true  of  the  leather  merchants  of  New  York  and 
the  paper  dealers  of  Philadelphia.  An  hour's  walk  through  the  whole- 
sale districts  of  New  York,  Philadelphia,  London,  Hamburg,  or  any 
of  the  many  smaller  cities  will  suffice  to  give  the  observer  many  examples 
of  this  grouping  of  mercantile  firms  engaged  in  the  same  business."  * 

(3)  The  desirability  of  being  near  the  consumer  accounts  for 
the  presence  of  retail  market  or  store  streets  in  our  larger  cities 
at  fairly  regular  intervals  of  six  or  eight  blocks,  and  the  necessity 
of  accessibility  to  a  large  market  explains  the  presence  of  the  de- 
partment stores  at  the  transportation  centers  of  such  a  city. 
(4)  The  influence  of  the  conditions  attending  the  beginning  of 
a  city  may  be  seen  in  the  crooked  streets  of  a  city  like  Boston, 
where  they  followed  paths,  or  in  the  location  of  financial  dis- 
tricts in  the  former  centers  of  towns  —  a  place  they  chose  in 
order  that  they  might  be  near  the  business  community  of  that 
day.  (5)  The  influence  of  social  control  is  strong  also.  Streets 
are  laid  out  according  to  pattern  ;  a  park  "  system  "  is  arranged ; 
zones  or  districts  devoted  exclusively  to  a  given  purpose  are 
set  up. 

The  continual  shifting  of  industries.  —  We  must  not  get  an 
impression  that  territorial  specialization  means  a  permanent, 
fixed,  rigid  apportionment  of  areas  to  specific  uses.  Quite  the 
reverse  is  the  case.     Continual  shifting  has  occurred  in  the  loca- 

•  J.  Russell  Smith,  Industrial  and  Commercial  Geoyraphy,  p.  868. 


TERRITORIAL   SPECIALIZATION  181 

tion  of  industries,  and  as  far  as  we  can  now  see,  will  continue 
to  occur.  The  development  of  transportation  and  communica- 
tion, which  made  possible  the  opening  of  the  agricultural  regions 
of  our  great  Middle  West  in  the  last  half  of  the  nineteenth  cen- 
tury, drove  thousands  of  acres  of  land  out  of  cultivation  in 
England  and  New  England,  for  the  farmers  tilling  the  poorer 
soils  of  these  regions  could  not  compete  with  the  cheaply  pro- 
duced and  cheaply  transported  grains  of  our  West.  With  the 
opening  of  this  western  region  and  the  drift  of  population  thither 
a  great  change  occurred  in  the  location  of  the  wholesale  drygoods 
trade  of  this  country.  New  York  City  has  not  retained  the  pro- 
portion of  this  business  it  had  in  earlier  days.  Western  com- 
petition, improved  transportation,  and  changes  in  the  sources  of 
raw  materials  are  causing  many  manufacturers  in  the  eastern 
part  of  the  United  States  to  consider  seriously  the  desirability 
of  a  shift  in  location.  Many  other  examples  might  be  given 
where  similar  shifts  have  been  considered  or  made. 

Upon  reflection  we  should  expect  this  to  be  the  case.  Man  is 
ever  developing  new  wants  and  new  arts  to  gratify  them.  Scores 
of  kinds  of  goods  are  used  to-day  that  our  grandfathers  did  not 
know,  and  the  old  industrial  localities  are  not  always  well 
fitted  to  the  new  enterprises.  In  other  cases,  change  of  locality 
may  be  caused  by  the  exhaustion  of  some  basic  natural  resource. 
There  are  dozens  of  deserted  lumber  camps  and  "  dead  "  mining 
towns,  from  which  the  population  has  moved,  which  tell  some- 
thing of  how  man  exploits  natural  resources.  Again,  technical 
improvements  and  inventions  continually  shift  the  relative  im- 
portance of  factors  determining  plant  location.  The  electric 
conduit  and  cheap  coal  transportation  have  freed  some  industries 
from  the  necessity  of  setthng  near  a  waterfall  or  a  coal  mine ; 
the  development  of  preservatives  and  the  refrigerator  car  gave 
other  industries  concerned  with  perishable  goods  more  freedom 
of  location ;  the  development  of  automatic  machines  freed  still 
other  industries  from  the  necessity  of  settling  near  a  skilled  labor 
supply. 

Then,  too,  social  control  plays  its  part.     A  state  railroad  com- 


182  OUR  ECONOMIC   ORGANIZATION 

mission,  by  putting  some  large  area  under  a  "  blanket  "  so  that 
from  some  source  of  raw  materials  all  points  in  the  area  have 
the  same  railroad  rate,  may  make  for  decentralization  of  the 
industries  of  that  area.  A  national  protective  tariff  may 
build  up  a  new  industry  and  some  new  industrial  center.  Finally, 
there  are  signs  that  the  industrial  forces  making  for  concentra- 
tion of  industries  in  our  metropolitan  centers  with  their  con- 
gested streets,  high  taxes,  and  high  living  costs  may  be  reaching 
their  maximum,.  It  is  certain  that  decentralization  in  the  form 
of  "  satellite  "  towns  is  occurring.  St.  Louis  has  its  Wellston, 
Edwardville,  Granite  City,  Madison,  Venice,  Brooklyn,  and 
East  St.  Louis.  Chicago  has  its  Hawthorne,  Argo,  Pullman, 
Whiting,  Indiana  Harbor,  East  Chicago,  Hammond,  and  Chi- 
cago Heights. 

Some  advantages  of  territorial  specialization.  —  The  outstand- 
ing advantage  which  may  be  claimed  for  territorial  specializa- 
tion is  increased  productivity.  After  all  allowance  has  been 
made  for  minor  defects,  it  remains  true  that  when  communities 
specialize  and  make  the  products  for  which  they  are  best  fitted, 
either  through  natural  endowment  or  through  the  development 
of  special  services  and  facilities,  the  want-gratifying  power  of 
mankind  is  greatly  increased.  This  increased  power  is  worked 
out  through  commerce.  An  account  of  the  conditions  determin- 
ing trade  between  communities  is  accordingly  really  an  account 
of  the  benefits  given  by  territorial  specialization. 

An  essential  prerequisite  to  territorial  specialization  is  a  satis- 
factory development  of  transportation  and  communication. 
When  these  facilities  do  not  exist  every  little  group  must  per- 
force be  self-sufficing.  We  saw  the  truth  of  this  statement 
when  studying  the  medieval  manor.  Modern  means  of  trans- 
portation and  communication  have,  however,  become  so  efficient 
that  we  may  assume  that  the  prerequisite  to  territorial  special- 
ization has  been  secured.  With  this  assumed,  let  us  now  con- 
sider under  what  circumstances  it  will  l}e  worth  while  for  com- 
munities to  specialize  and  to  exchange. 

A  case  which  every  one  will  understand  at  once  is  this  :  when 


TERRITORIAL   SPECIALIZATION  183 

a  certain  locality  can  produce  only  one  good,  say  diamonds  or 
copper,  for  example  (let  us  assume  it  can  produce  it  very  effi- 
ciently) ,  it  will  be  expedient  for  that  community  to  trade  with 
the  rest  of  the  world.  The  nitrate  deserts  of  Chile  and  regions 
producing  tropical  spices  are  good  cases  in  point.  In  such  cases 
trade  enables  the  specialized  district  to  get  commodities  it  could 
not  otherwise  have  at  all,  and  enables  the  rest  of  the  world 
sometimes  to  get  commodities  it  could  not  otherwise  have, 
sometimes  merely  to  get  them  more  cheaply. 

There  is  another  case  where  specialization  of  localities  is 
.worth  while.  Even  though  a  given  district  could,  as  a  physical 
possibility,  produce  many  commodities  —  could  indeed  be 
self-sufficing  —  it  may  well  gain  by  trade  with  other  districts, 
and  other  districts  gain  by  trade  with  it.  If  this  community  is 
particularly  well  fitted  to  produce  some  things  and  only  moder- 
ately well  fitted  to  produce  others,  and  the  reverse  is  true  in 
other  communities,  it  ought  to  specialize  in  its  lines  of  greatest 
efficiency  and  secure  its  other  articles  from  abroad.  True,  it 
might  be  able  to  make  these  foreign  articles  at  home  at  a  reason- 
able cost ;  but  it  could  secure  them  at  a  still  lower  figure  from 
elsewhere.  For  example,  the  soil  and  climate  of  Minnesota 
will  produce  both  wheat  and  corn,  but  are  better  for  wheat 
production.  Illinois  also  can  produce  both  wheat  and  corn, 
but  is  better  fitted  for  corn  production.  Under  these  circum- 
stances, it  is  advantageous  for  the  people  of  Minnesota  to  give 
their  major  attention  to  raising  wheat,  while  the  people  of  Illinois 
specialize  in  corn  raising.  The  same  principle  applies  to  other 
localities.  In  Florida,  fruit  can  be  raised  easily  while  the  cereal 
crops  do  not  grow  so  readily,  although  something  can  be  done 
with  them  if  enough  time  and  labor  are  spent.  In  Ilhnois  and 
Iowa  cereal  crops  can  easily  be  produced  but  semi-tropical 
fruits  can  be  grown  in  these  locaUties  only  at  considerable  diffi- 
culty "and  expense.  It  is  easy  to  see  in  what  ways  these  com- 
munities would  specialize. 

A  third  case  is  merely  a  variant  of  the  second.  Suppose  that 
a  certain  community  were  so  blessed  with  natural  advantages, 


184  OUR   ECONOMIC   ORGANIZATION 

skilled  population,  and  business  organization,  that  it  was  the 
best  region  in  the  world  for  the  production  of  wheat,  cotton, 
iron  ore,  nitrate,  and  for  that  matter,  all  the  rest  of  the  commod- 
ities we  use  to-day.  At  first  glance  it  might  seem  that  such 
a  community  would  not  care  to  trade  with  the  rest  of  the  world. 
But,  let  us  look  more  closely,  using  another  illustration  in  our 
closer  view.  Suppose  that  a  certain  man  were  the  best  lawyer, 
the  best  stenographer,  the  best  file  clerk,  the  best  office  boy,  and 
the  best  janitor  in  the  United  States.  He  would  not  do  all 
these  things.  He  would  specialize  in  the  practice  of  law,  and 
would  hire  stenographers,  file  clerks,  office  boys,  and  janitors. 
The  community  we  have  been  considering  would  take  a  similar 
course.  It  would  give  its  major  attention  to  the  one  thing, 
or  to  the  small  group  of  things,  in  which  its  advantage  was 
relatively  most  worth  while,  and  would  hire  others,  through 
trade,  to  provide  it  with  the  rest  of  the  goods  it  desired. 

In  this  discussion  of  trade  between  localities  we  have  not  de- 
layed to  consider  whether  the  localities  concerned  are  within 
a  single  nation,  so  that  it  would  be  called  internal  trade,  or  are 
in  different  nations  so  that  it  would  be  called  international 
trade.  The  principles  are  the  same  in  either  case.  It  is,  how- 
ever, worth  noticing  that  this  discussion  gives  us  a  certain 
basis  for  estimating  the  value  of  commercial  policies  of  nations, 
and  particularly  the  moot  question  of  protection  versus  free 
trade. 

The  basis  for  the  free  traders'  position  should  now  be  clear 
enough.  He  wants  the  whole  world  to  be  unhampered  in  the 
assignment  of  localities  to  the  making  of  goods  for  which  they 
are  best  fitted ;  arguing  that  thus  the  wants  of  man  will  be 
most  fully  gratified.  Against  this  position,  the  protectionist 
has  really  only  two  arguments  which  are  worthy  of  serious  con- 
sideration. One  of  them  is  the  so-called  infant  industry  argu- 
ment, which  in  essence  is  that  there  is  a  certain  amount  of  in- 
ertia to  overcome  in  starting  new  industries,  even  though  a  com- 
munity is  really  well  fitted  for  them,  and  that  accordingly  these 
industries  ought  to  be  protected  from  outside  competition  in 


TERRITORIAL  SPECIALIZATION  185 

the  period  of  their  infancy.  This  is,  of  course,  an  argument 
for  a  temporary  tariff  and  not  for  a  permanent  one.  The  other 
argument  of  the  protectionist,  which  is  worth  serious  considera- 
tion, is  that  increased  productivity  is  not  necessarily  the  only 
goal  which  is  worth  seeking.  For  example,  it  may  be  worth 
while  to  develop  industries  for  which  the  nation  is  really  not 
well  fitted,  in  order  that  it  may  be  self-sufficing  when  it  is  cut 
off  from  other  nations  in  time  of  war.  This  argument  applies 
particular!}^,  of  course,  to  industries  directly  and  indirectly 
connected  with  the  making  of  munitions  of  war.  Another  ex- 
ample where  increased  productivity  is  not  necessarily  the  ulti- 
mate good  may  be  seen  in  the  following  section. 

Some  disadvantages  of  specialized  localities.  —  Some  of  the 
disadvantages  of  specialization  of  localities  will  appear  in  a  later 
study  when  we  take  a  summary  view  of  the  results  of  our  spe- 
cialized cooperative  way  of  producing  goods.  One  or  two  dis- 
advantages will  be  considered  here,  however. 

When  a  locality  specializes  in  producing  only  one  commodity, 
but  produces  that  in  vast  quantities,  the  civilization  of  the  whole 
locality  is  likely  to  become  stamped  with  the  nature  of  the  in- 
dustry. There  are  certain  places  in  the  north  of  Michigan 
that  are  so  dominated  by  the  copper  industry  that  it  is  a  common 
saying  in  the  copper  camps  that  "  Copper  is  God."  Other 
towns,  such  as  Pittsburgh,  become  dominated  by  the  manu- 
facture of  steel  and  thousands  of  the  workers  in  the  steel  mills 
know  almost  nothing  of  life  excepting  steel  manufacture.  In 
other  districts,  mining  seems  to  the  inhabitants  to  be  the  hub 
of  the  universe.  The  people  of  such  localities  become  provincial. 
They  think  only  in  terms  of  the  work  which  they  see  going  on 
around  them.  They  "  do  not  have  many  contacts."  It  is 
hard  to  believe  that  people  brought  up  under  such  conditions 
can  think  independently  on  questions  which  are  important  to 
the  nation  as  a  whole,  or  to  believe  that  they  can  have  a  proper 
perspective  of  the  value  of  their  work  compared  with  other  kinds 
of  industry  and  commerce. 

Charles  Dickens,  in  describing  a  manufacturing  town,  gives 


186  OUR  ECONOMIC   ORGANIZATION 

a  picture  of  what  may  result  from  intense  local  specialization 
under  certain  conditions. 

"It  was  a  town  of  red  brick,  or  of  brick  that  would  have  been  red 
if  the  smoke  and  ashes  had  allowed  it ;  but  as  matters  stood  it  was  a 
town  of  unnatural  red  and  black  like  the  painted  face  of  a  savage.  It 
was  a  town  of  machinery  and  tall  chimneys,  out  of  which  interminable 
serpents  of  smoke  trailed  themselves  for  ever  and  ever,  and  never  got 
uncoiled.  It  had  a  black  canal  in  it,  and  a  river  that  ran  purple  with 
ill-smelling  dye,  and  vast  piles  of  building  full  of  windows  where  there 
was  a  rattling  and  a  trembling  all  day  long,  and  where  the  piston  of 
the  steam-engine  worked  monotonously  up  and  down,  like  the  head 
of  an  elephant  in  a  state  of  melancholy  madness.  It  contained  several 
large  streets  all  very  like  one  another,  and  many  small  streets  still 
more  Uke  one  another,  inhabited  by  people  equally  hke  one  another, 
who  all  went  in  and  out  at  the  same  hours,  with  the  same  sound  upon 
the  same  pavements,  to  do  the  same  work,  and  to  whom  every  day  was 
the  same  as  yesterday  and  to-morrow,  and  every  year  the  counterpart 
of  the  last  and  the  next. 

"These  attributes  of  Coketown  were  in  the  main  inseparable  from 
the  work  by  which  it  was  sustained ;  against  them  were  to  be  set  off 
comforts  of  life  which  found  their  way  all  over  the  world,  and  ele- 
gancies of  life  which  made,  we  will  not  ask  how  much  of  the  fine  lady, 
who  could  scarcely  bear  to  hear  the  place  mentioned.  The  rest  of  its 
features  were  voluntary,  and  they  were  these. 

"You  saw  nothing  in  Coketown  but  what  was  severely  workful. 
If  the  members  of  a  religious  persuasion  built  a  chapel  there  —  as 
the  members  of  eighteen  religious  persuasions  had  done  —  they  made 
it  a  pious  warehouse  of  red  brick,  with  sometimes  (but  this  is  only  in 
highly  ornamental  examples)  a  bell  in  a  birdcage  on  the  top  of  it.  The 
solitary  exception  was  the  New  Church ;  a  stuccoed  edifice  with  a 
square  steeple  over  the  door,  terminating  in  four  short  pinnacles  like 
florid  wooden  legs.  All  the  public  inscriptions  in  the  town  were 
painted  ahke,  in  severe  characters  of  black  and  white.  The  jail  might 
have  been  the  infirmary,  the  infirmary  might  have  been  the  jail,  the 
town-hall  might  have  been  either,  or  both,  or  anything  else,  for  any- 
thing that  appeared  to  the  contrary  in  the  graces  of  their  construction. 
Fact,  fact,  fact,  everywhere  in  the  material  aspect  of  the  town;  fact, 
fact,   fact,   everywhere   in   the   immaterial.     The   M'Choakum-child 


TERRITORIAL   SPECIALIZATION  187 

school  was  all  fact,  and  the  school  of  design  was  all  fact,  and  the  re- 
lations between  master  and  man  were  all  fact,  and  everything  was 
fact  between  the  cradle  and  the  cemetery,  and  what  you  couldn't 
state  in  figures,  or  show  to  be  purchaseable  in  the  cheapest  market 
and  saleable  in  the  dearest,  was  not,  and  never  should  be,  world  with- 
out end,  Amen."  ^ 

Territorial  specialization  means  interdependence  and  coop- 
eration. —  Whatever  may  be  the  advantages  or  disadvantages 
of  specialization  of  localities,  it  is  clear  that  when  localities  do 
specialize  they  become  quite  dependent  upon  one  another. 
This  is  only  another  way  of  saying  that  there  is  cooperation 
between  them.  When  one  region  produces  chiefly  grain  and 
another  one  manufactures  and  each  then  supplies  the  other 
with  goods  they  want,  it  is  clear  that  each  is  depending  on 
the  other  and  that  the  people  of  both  have  their  wants  satisfied 
through  cooperation.  The  Minnesota  wheat  farmers,  whether 
they  think  of  it  or  not,  and  whether  they  wish  to  do  so  or  not, 
are  cooperating  with  the  Europeans  who  eat  the  grain  which 
they  raise.  The  English  workman,  the  German  chemist,  the 
French  wine  pressor  and  the  Italian  olive  grower  are,  whether 
they  know  it  or  not  and  whether  they  wish  to  do  so  or  not, 
cooperating  with  the  Minnesota  farmer  and  producing  for  him 
the  things  which  he  wants.  The  people  of  all  countries  have 
become,  like  the  workers  in  a  single  plant,  interdependent  and 
cooperative. 

PROBLEMS 

1.  Name  two  or  three  kinds  of  goods  which  could  be  produced  in 
your  neighborhood  or  region  but  which  you  obtain  more  cheaply 
through  cooperating  with  the  people  of  other  districts. 

2.  Look  in  the  statistical  atlas  of  the  census  of  the  United  States 
or  in  some  commercial  geography  and  find  out  what  districts  are  de- 
voted primarily  to  the  following  industries :  corn  growing,  wheat 
raising,  citms  fruits,  cotton  culture,  producing  petroleum,  gold  mining, 
coal  mining,  lumbering. 

1  Charles  Dickens,  Hard  Times. 


188  OUR  ECONOMIC   ORGANIZATION 

3.  Of  the  industries  mentioned  above,  what  four  are  most  highly 
localized  ?    That  is  to  say,  are  found  in  the  smallest  areas  ? 

4.  What  is  the  principal  crop  raised  in  the  general  region  of  your 
town  or  city?  Why  have  the  farmers  specialized  in  this  crop?  If, 
however,  there  is  no  marked  specialization  in  the  region  about  your 
city,  why  do  you  think  it  has  not  occurred  ? 

5.  In  the  table  showing  local  concentration  of  certain  industries 
by  states,  what  kinds  of  industries  are  highly  localized  in  New  York? 
Does  the  presence  of  a  large  and  dense  population  help  explain  why 
these  industries  should  be  concentrated  in  New  York? 

6.  Select  three  of  the  manufacturing  plants  of  your  town  or  city. 
In  the  case  of  each  plant  answer  these  questions  :  Is  it  in  your  town  to 
secure  proximity  to  raw  materials?  To  secure  cheap  power  and  fuel? 
To  secure  proximity  to  markets ?    To  secure  an  adequate  labor  supply? 

7.  Are  there  any  manufacturing  industries  in  your  town  or  city 
which  seem  to  have  located  there  by  accident  ?  If  so,  have  any  special 
facilities  or  services  developed  around  them? 

8.  Has  your  town  or  city  specialized  in  the  making  of  certain  goods  ? 
If  so,  what  reasons  can  you  give  for  such  speciaUzation  ? 

9.  Does  the  raikoad  serving  your  town  or  district,  or  the  local 
chamber  of  commerce  or  commercial  club  of  your  town,  publish  in- 
formation designed  to  attract  manufacturing  industries  to  your  region  ? 
If  they  do,  to  what  advantages  do  they  call  particular  attention  ? 

10.  Can  you  find  out  if  your  community,  either  through  its  local 
government  or  through  some  association  of  citizens,  has  ever  offered 
special  inducements,  such  as  temporary  freedom  from  taxation,  cheap 
land,  or  reduced  rates  on  power,  to  persuade  manufacturing  plants  to 
locate  with  you? 

11.  Is  it  probable  that  it  is  in  the  long  run  wise  for  a  manufacturing 
plant  to  locate  in  a  community  as  a  result  of  such  inducements  as  those 
suggested  above? 

12.  Make  a  list  of  the  expenses  which  would  be  involved  in  moving 
a  plant  from  one  city  to  another.  Does  your  list  help  explain  why  a 
plant  might  remain  in  an  unfavorable  location  ? 

13.  Are  there  manufacturing  industries  in  your  town  which  are 
tapping  a  labor  reservoir  which  would  not  be  used  except  for  the 
presence  of  these  industries  ? 


TERRITORIAL  SPECIALIZATION  189 

14.  Suppose  you  were  about  to  buy  a  suit  of  clothes.  Would  you 
think  several  factors  important,  such  as  appearance,  quality,  style, 
etc.?  Are  all  of  equal  weight?  Make  a  weighting  table  for  color, 
fashion,  and  weaving  quality  and  fit  which  will  express  your  judgment 
in  buying  a  suit  of  clothes. 

15.  Study  the  list  of  factors  on  p.  177  to  determine  whether  you 
would  accept  the  weighting  there  listed  if  you  were  studying  where  to 
locate  a  modern  cotton  manufacturing  plant.  Read  carefully  in  this 
connection  the  account  of  the  specialization  which  has  occurred  in 
Lancashire. 

16.  Ought  the  people  of  cities  to  produce  a  greater  proportion  than 
they  now  do  of  the  food  they  consimie?  Make  a  list  of  as  many 
agencies  as  you  can  which  are  concerned  with  providing  a  city 
with  food. 

17.  Is  there  a  "manufacturing  district "  in  your  town?  If  so,  what 
determined  its  location  ?  Was  it  natural  conditions  ?  Labor  supply  ? 
Social  control  ?    Or  some  other  factor  ? 

18.  Where  is  the  residence  section  of  your  town?  What  factors 
determined  the  location  of  this  section  ? 

19.  Is  there  a  "central  shopping  district"  in  your  town?  A  bank- 
ing district?  Scattered  retail  districts?  Why  are  these  districts 
located  where  they  are  ? 

20.  Make  a  list  of  as  many  reasons  as  you  can  why  bankers  might 
wish  to  be  grouped  closely  together  in  a  city.  Can  you  give  any 
reasons  for  their  opposing  such  grouping? 

21 .  Make  a  list  of  the  reasons  why  industries  tend  to  remain  in  a  given 
locality  when  once  they  have  settled  there.  Make  another  list  of 
the  factors  making  for  the  movement  of  industries  from  one  locality 
to  another. 

22.  The  invention  of  the  refrigerator  car  made  possible  the  shipment 
of  fresh  meat  for  long  distances  and  thus  made  it  possible  for  packing 
industries  to  concentrate  near  animal-growing  districts.  Can  you  cite 
other  cases  in  which  the  localization  of  industry  is  dependent  upon 
science  and  invention  ? 

23.  "Commerce  between  localities  does  not  increase  the  wealth  of 
either  section;  it  only  transfers  goods  from  one  place  to  another." 
Is  this  true  ? 


190  OUR   ECONOMIC   ORGANIZATION 

24.  Why  is  it  truthful  to  say  that  international  trade  is  merely 
specialization  of  locaUties  ? 

25.  Mr.  X  is  a  high-grade  lawyer,  he  is  also  the  best  stenographer  in 
his  state.  Explain  carefully  just  why  he  is  likely  to  hire  some  one  to  do 
his  stenographic  work. 

26.  A  is  a  good  musician,  but  is  temperamentally  unfitted  for  other 
work.  B,  wliile  fond  of  music,  is  efficient  only  in  farming.  Is  speciali- 
zation and  exchange  likely  to  take  place?  Would  the  situation  be 
different  if  A  and  B  represented  regions  of  different  natural  endow- 
ment? 

27.  A  by  one  day's  labor  can  make  nine  units  of  .t  or  two  units  of  y. 
B  by  one  day's  labor  can  make  two  units  of  x  or  nine  units  of  y.  Would 
specialization  and  exchange  be  likely  to  take  place  ?  Would  the  situa- 
tion be  different  if  A  and  B  represented  regions  instead  of  men  ? 

28.  A  by  one  day's  labor  can  make  twenty  units  of  x  or  ten  units  of 
y.  B  by  one  day's  labor  can  make  fifteen  units  of  x  or  five  units  of  y. 
Would  specialization  and  exchange  be  likely  to  take  place  ?  Would  the 
situation  be  different  if  A  and  B  represented  regions  instead  of  men  ? 

29.  An  American  statesman  of  the  nineteenth  century  declared  that 
it  was  bad  policy  for  the  United  States  to  import  any  commodity  that 
could  possibly  be  produced  in  the  United  States.     Do  you  agree? 

30.  Another  statesman  urged  that  no  commodity  which  could  be 
produced  in  the  United  States,  with  the  same  amount  of  labor  as  in 
foreign  countries,  could  be  economically  imported.  Do  you  think  this 
position  tenable? 

31.  It  has  been  asserted  that  the  United  States  ought  to  produce 
at  home  all  commodities  which  are  now  imported  and  thus  save  the 
cost  of  transportation  which  amounts  to  several  hundred  million 
dollars  annually.  Apply  this  argument  to  trade  between  the  Middle 
West  and  the  Atlantic  coast  and  expose  the  fallacies  involved  in  it. 

32.  List  the  advantages  and  the  disadvantages  which  come  from 
specialization  of  localities  and  be  prepared  to  explain  each  one. 

33.  "Commerce  leads  to  interdependence  between  nations  and  thus 
checks  the  tendency  to  war."  "The  international  struggle  for  trade 
is  a  potent  force  to  war."  With  which  of  these  quotations  do  you 
agree  ?     Could  both  be  true  ? 

34.  Make  an  outline  of  the  main  points  in  this  lesson. 


TERRITORIAL   SPECIALIZATION  191 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  Selections  89-90,  146,  147. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life: 

Series  B,  Lesson  B-1 :  Nagely,  "  The  Effect  of  War  on  Commerce 
in  Nitrate." 
Lesson  B-4:  McLaughlin,  "  Feeding  a  City." 
By  making  use  of  the  material  available  in  almost  any  standard 
collegiate  text  in  economics  one  or  more  lessons  on  international  trade, 
protection,  and  free  trade  may  be  readily  introduced  at  this  point. 
Suggestive  of  such  texts  are  the  following : 

Taussig,  Principles  of  Economics,  ch.  36  and  37. 

Ely,  Outlines  of  Economics  (Third  Revised  edition),  ch.  XVIII. 


STUDY  XII 

AN  EVALUATION  OF  SPECIALIZATION 

PURPOSES  OF  THIS  STUDY : 

1.  To  see  why  specialization  increases  productivity. 

2.  To  study  evils  which  may  follow  in  the  train  of  specialization,  and 

learn  how  to  meet  them. 

3.  To  find  what  limitations,  if  any,  exist  to  the  growth  of  specialization. 

4.  To  get  a  summary  view  of  some  incidental  results  of  specialization. 

The  sources  of  the  advantages  of  specialization.  —  There 
can  be  no  question  wherein  the  benefits  of  speciahzation  he. 
They  he  in  increased  productivity.  "  If  any  reader  doubts 
the  benefits,  let  him  make  a  list  of  the  things  he  uses  and  con- 
sumes in  the  course  of  a  single  day,  and  then  estimate  the  time 
it  would  take  him  to  produce  these  by  his  own  unaided  labor ; 
such  an  experiment  will  do  more  than  any  amount  of  reading 
to  convince  him."  ^  But  whence  come  these  benefits?  Why 
does  specialization  increase  productivity? 

In  the  case  of  territorial  specialization  the  reasons  why 
specialization  increases  our  command  over  want-gratifying 
goods  are  simple  enough.  Specialization  of  localities  enables 
people  in  one  locality  to  draw,  so  to  speak,  upon  the  resources 
of  the  whole  world  ;  to  secure  goods  from  localities  better  fitted 
for  their  production  than  is  their  home  region  —  some  cases 
even  involving  utter  inability  of  the  home  region  to  produce 
them.  The  details  of  this  situation  appeared  at  some  length 
in  the  study  on  the  localization  of  industries.     (See  Study  XI.) 

In  the  case  of  division  of  labor  proper  —  the  specialization  of 
trades,   processes,   and   operations  —  the   reasons  for  the  in- 

'  Clay,  Ecunumics  for  the  General  Reader  (American  edition),  p.  38. 

192 


AN   EVALUATION   OF  SPECIALIZATION  193 

creased  productivity  are  as  follows :  (1)  The  division  of  rela- 
tively complex  trades  into  simple  processes  and  into  even 
simpler  operations  lessens  quite  considerably  the  difficulty  of 
learning  the  job.  The  time  of  learning  is  accordingly  shorter, 
the  waste  of  materials  in  learning  is  presumably  less ;  the 
productive  resources  of  the  individual  are  more  quickly  avail- 
able for  society's  needs. 

(2)  The  performance  over  and  over  again  of  the  specialized 
task  means  a  greater  development  of  skill  and  dexterity  of 
both  hand  and  brain  than  is  possible  when  performing  many 
different  tasks.  "  The  estimation  of  forces  and  sizes,  the  exact 
coordination  of  hand  and  eye  become  instinctive  (habitual) ; 
by  practice  is  built  up  the  specialized  experience  which  is  the 
explanation  of  achievement  in  all  kinds  of  work  —  the  crafts- 
man's '  sense  '  of  the  possibilities  of  his  materials,  the  dealer's 
*  instinct '  for  his  market,  the  physician's  '  intuition  '  of  disease, 
the  connoisseur's  '  feeling  '  for  quality  in  the  objects  of  his 
study."  ^  Brain,  nerve,  and  muscle  coordinate  smoothly  for 
the  quicker  and  less  tiring  performance  of  tasks. 

(3)  The  differentiation  of  tasks  makes  possible  the  dis- 
tribution of  work  so  that  each  may  work  at  the  thing  for  which 
he  is  best  qualified  either  by  natural  endowment  or  by  training. 
It  is  a  gain  that  the  person  gifted  with  artistic  ability  may  con- 
centrate in  the  field  for  which  he  is  best  fitted ;  that  each  of  us 
may  concentrate  on  that  which  we  do  best.  This  gain  may  be 
readily  understood  by  comparing  it  with  the  gain  secured  from 
the  locahzation  of  industries.     (See  pages  182-185.) 

(4)  The  assignment  of  a  worker  to  a  particular  task  makes 
possible  the  fuller  utilization  of  equipment  than  would  be  true 
if  a  worker  passed  from  one  task  to  another,  using  (presumably) 
different  equipment  for  each  task.  Idle  tools  or  machines 
represent  just  so  much  wasted  productive  resource.  Then,  too, 
the  time  lost  by  the  worker  in  passing  from  one  task  to  another 
and  in  getting  his  thoughts  centered  on  the  new  undertaking  is 
a  factor  to  be  kept  in  mind. 

•  Adapted  from  Clay,  Economics  for  the  General  Reader  (American  edition),  p.  22. 


194  OUR   ECONOMIC   ORGANIZATION 

(5)  Specialization  is  of  great  assistance  also  in  securing  and 
retaining  that  which  we  have  been  calling  acquired  knowledge. 
"  Without  division  of  labor  the  inventions  and  discoveries  which 
have  made  modern  man's  power  over  the  forces  of  nature  so 
much  greater  than  that  of  his  remote  ancestors,  could  not  have 
been  made,  because  no  man  would  have  had  time  to  specialize 
sufficiently  in  the  particular  lines  of  study  required.  When 
knowledge  has  once  been  acquired,  it  would  have  often  been 
lost  if  it  were  not  for  the  existence  of  books  and  instruments 
and  the  exertions  of  a  specialized  class  of  educators  which 
could  not  exist  in  the  absence  of  division  of  labor."  ^  Who 
can  measure  the  contribution  of  acquired  knowledge  to  our 
powers  of  want-gratification? 

In  the  case  of  specialization  of  management,  increased  pro- 
ductivity comes  from  precisely  those  forces  which  explain  it  in 
the  case  of  division  of  labor  proper,  for  management  is  after 
all  merely  one  form  of  mental  labor. 

In  the  case  of  specialization  of  capital,  it  comes  from  using 
for  a  particular  task  a  device  that  harnesses  the  forces  of 
nature.  Every  tool  or  mechanical  device  is,  in  a  sense,  a 
scheme  for  harnessing  natural  forces,  —  witness  the  electric 
motor,  the  gas  engine,  the  locomotive,  the  wind  mill,  or  the 
homely  crowbar.  When,  now,  a  tool  or  mechanical  device  is 
built  or  arranged  for  one  specialized  purpose  there  is  great 
increase  of  productive  power  coming  from  the  fact  that  great 
natural  forces  are  directed  specifically  to  one  end. 

Possible  disadvantages  connected  with  specialization.  — 
Just  because  specialization  increases  productivity  and  because 
there  are  ample  reasons  why  it  has  the  power  to  do  so,  it  does 
not  inevitably  follow  that  society  gains  by  specialization.  It  is 
entirely  possible,  for  example,  that  the  increased  productivity 
might  be  along  harmful  lines.  Society  is  presumably  not  the 
gainer  by  increased  productivity  of  the  swindler,  the  counter- 
feiter, the  robber,  or  the  gambler ;  it  is  presumably  not  better 
off  for  an  abundance  of  goods  making  for  debauchery,  either 

*  Edwin  Cannan,  Wealth,  pp.  41-51. 


AN   EVALUATION   OF   SPECIALIZATION  195 

mental  or  physical.  Even  if  the  increased  productivity  were 
not  along  harmful  lines,  society  might  not  be  the  gainer  if  the 
product  were  so  inequitably  shared  among  the  members  of  the 
group  as  to  make  for  deterioration  rather  than  progress.  Both 
of  these  points  will  have  to  be  discussed  a  bit  later.  We  can 
at  this  time  realize  that  there  is  a  place  for  social  control  of 
specialization. 

Moreover,  what  is  society?  Perhaps  it  were  better  not  to 
attempt  a  definite  answer  to  this  question  at  this  time,  but  it 
can  certainly  be  said  that  in  society  there  are  individuals.  Now 
it  might  be  that  specialization  would  be  so  harmful  to  certain 
individuals  as  to  quite  offset  the  gains  flowing  from  the  greater 
productivity  it  made  available  for  society's  use.  Can  in- 
dividuals be  thus  adversely  affected?  We  saw  the  possibility 
of  this  happening  for  whole  groups  of  individuals  in  our  discus- 
sion of  localization  of  industries.  Dickens's  Coke  town  (see  p. 
186)  should  stand  for  us  as  a  warning  against  a  very  real  danger. 

The  same  possibility  of  harm  to  individuals  exists  in  the  case 
of  division  of  labor  proper,  especially  when  this  division  has 
reached  the  stage  of  narrow  detailed  operations.  The  repetitive 
performance  of  a  narrowly  specialized  task  may  mean  terrible 
monotony  and  fatigue.  It  may  even  cause  the  breakdown  of 
nerve  centers  with  resultant  serious  injury  to  health.  At  the 
very  least  it  may  mean  lack  of  interest  and  accordingly  in- 
efficient work.  "  A  man  can  get  no  pleasure  from  his  work  when 
it  imposes  a  constant  strain  upon  the  same  muscles  and  nerves  ; 
when  the  tedium  of  constantly  repeating  the  same  narrow 
movements  compels  the  cultivation  of  indifference  ;  when  strict 
confinement  to  a  single  process  hides  from  him  the  true  purpose 
and  utility  of  his  work ;  and  he  cannot  claim  any  single  whole 
commodity  as  the  product  of  his  labor."  ^  The  work  of  the 
modern  operative  in  a  cotton  mill  or  a  shoe  factory  is  certainly 
a  very  far  cry  in  its  interest  and  educational  significance  from 
the  situation  revealed  (p.  48)  in  the  statement  of  how  men  were 
trained  for  business  in  the  days  of  the  craftsmen. 

>  Hobson,  J.  A.,  The  Social  Problem,  pp.  226-230. 


196  OUR  ECONOMIC   ORGANIZATION 

It  must  be  remembered,  however,  that  this  is  not  the  whole 
story.  The  interest  and  educational  significance  within  the 
operative's  daily  task  may  be  far  less  than  it  was  in  non- 
specialized  industry,  but  specialization  has  made  possible  an 
environment  outside  his  daily  task  which  goes  far  to  offset  its 
evils.  The  modern  world's  variety  in  consumption  diet ;  its 
contacts  with  new  commodities,  new  persons,  and  new  ideas ; 
its  increased  leisure,  and  income,  and  its  safety  from  famine, 
and  pestilence,  may  largely  be  credited  to  specialization. 

Narrow  specialization  may  be  harmful  to  the  worker,  also, 
in  that  he  becomes  fitted  for  but  one  small  task  "  with  lessened 
adaptability  and  capacity  for  undertaking  novel  work  "  and 
some  shift  of  the  consumers'  desires,  or  some  happening  within 
industry,  such  as  a  new  invention,  may  throw  him  out  of  employ- 
ment, leaving  him  with  little  ability  to  take  up  some  other  line  of 
work.  The  point  must  not  be  carried  too  far,  for  division  of 
tasks  through  specialization  renders  it  easier  to  take  up  a  new 
line  of  work  than  would  otherwise  be  the  case. 

But  even  on  grounds  of  productivity  alone  there  are  certain 
aspects  of  specialization  which  give  us  pause.  Already  the 
prevalence  of  specialized  machine  industry  is  causing  a  dearth 
of  the  all-around  mechanic,  with  "  general  intelligence  and 
training,"  with  ability  to  "  find  himself  "  in  a  new  situation, 
with  ability  to  rise  to  emergencies.  Few  things  are  more 
common  these  days  than  the  complaint  of  our  captains  of 
industry  of  the  dearth  of  men  fitted  to  assume  positions  of 
responsibility ;  of  the  plethora  of  men  with  lack  of  vision  and 
imagination.  Very  likely  specialization  is  not  solely  to  blame 
for  this  situation,  but  it  is  certainly  largely  to  blame.  A 
moment's  reflection,  however,  will  show  that  the  remedy  lies 
not  in  the  abolition  of  specialization,  but  in  the  development  of 
systems  of  training  and  education  which  will  provide  men  of 
the  quality  needed. 

And  after  all,  there  may  be  higher  goals  than  productivity. 
Production  is  not  an  end  in  itself.  The  goal  of  our  economic 
activity  is  man.     We  have  seen  (p.  185)  how  political  consid- 


AN   EVALUATION    OF   SPECIALIZATION  197 

erations,  such  as  the  maintenance  of  national  hfe,  may  justify 
disregarding  economic  considerations  of  increased  productivity 
and  may  justify  abandoning  territorial  specialization  with  re- 
spect to  certain  goods  in  order  that  the  nation  may  be  self- 
sufficing  in  time  of  war.  Increased  productivity  can  scarcely 
be  set  up  as  the  "  ultimate  good  "  from  all  conceivable  points 
of  view. 

The  limits  of  specialization.  —  In  the  light  of  all  the  facts, 
few  people  will  deny  that  the  advantages  of  specialization  far 
outweigh  its  disadvantages.  The  rich  and  varied  social  and 
economic  life  wliich  we  enjoy  to-day  could  not  have  existed 
without  it.  Our  analysis  of  its  disadvantages  should  leave 
with  us  not  an  impression  that  specialization  should  be  abolished 
but  an  understanchng  of  the  points  at  which  it  needs  correction 
in  order  tliat  it  may  in  the  future  be  made  even  more  useful 
to  man.  It  ought  to  be  possible  for  specialization  to  play  a 
larger  and  larger  part  in  our  industrial  life,  - —  and  that  with 
the  attendant  evils  contmually  diminishing. 

But  how  far  can  it  be  carried?  What  are  the  limits  of 
specialization?  The  answer  to  these  questions  may  be  more 
easily  understood  if  we  bear  in  mind  that  specialization,  in  our 
industrial  Hfe,  has  two  aspects.  There  is,  first,  the  splitting 
up  or  differentiation  of  tasks,  and  there  is,  second,  the  knitting 
together  of  the  speciahsts  into  a  producing  mechanism. 

As  far  as  the  spHtting  up,  or  differentiation  is  concerned,  the 
chief  factors  which  hmit  specialization  are  (a)  the  nature  of  the 
employment  and  (6)  considerations  of  technological  efficiency. 
Farming  is  an  employment  that  will  illustrate  the  first  of  these. 
"  Agriculture  is  not  susceptible  of  so  great  a  division  of  occu- 
pations as  many  branches  of  manufactures  because  its  different 
operations  cannot  possibly  be  simultaneous.  One  man  cannot 
be  always  plowing,  another  sowing,  and  another  reaping.  A 
workman  who  practices  only  one  agricultural  operation  would 
be  idle  eleven  months  of  the  year."  ^  It  is  clear  enough  that 
the  seasonal  character  of  the  work  is  largely  responsible  for 

'  John  Stuart  Mill,  Principles  of  Political  Economy,  I,  175. 


198  OUR   ECONOMIC   ORGANIZATION 

this  situation,  and  seasonal  work  is  to  be  found  in  many  occupa- 
tions. 

The  technological  limits  of  specialization  are  very  remote. 
They  will  have  been  reached  only  when  science  has  exhausted 
its  possibilities  of  developing  special  devices  and  processes  for 
special  uses.  Keeping  in  mind  that  machines  specialized  to 
perform  one  small  task  may  be  integrated  or  combined  into 
automatic  monsters  (see  p.  152),  it  becomes  clear  that  we  are 
to-day  so  far  from  having  reached  this  limit  of  specialization 
that,  for  practical  purposes,  there  is  no  limit. 

Of  course,  we  are  not  interested  in  differentiation  as  a  labo- 
ratory experiment.  The  ultimate  goal  of  economic  activity  is 
man,  not  experimentation.  As  we  know,  the  differentiation 
must  in  this  case  be  followed  by  correlation,  which  is,  in  our 
society,  accomplished  by  authority  and  through  exchange. 
In  practice,  differentiation  will  not  be  carried  to  lengths  which 
cannot  be  justified  by  our  correlating  agencies.  Let  us  there- 
fore look  at  the  limits  of  specialization  from  the  point  of  view 
of  these  agencies. 

In  correlation  through  authority  the  significant  element  Ls, 
of  course,  administration  or  management.  How  far,  accord- 
ingly, the  differentiation  which  is  to  be  coordinated  by  author- 
ity can  wisely  be  carried,  depends,  in  part,  upon  our  develop- 
ment of  administrative  ability,  and  administrative  technique. 
In  these  fields  we  have  apparently  only  scratched  the  surface. 
Accounting,  though  it  dates  back  to  the  Italian  cities  of  the 
middle  ages,  is  still  in  its  infancy  as  an  instrument  of  control 
in  the  hands  of  the  business  executive,  as  are  also  business 
research  and  business  statistics.  The  use  of  the  intra-plant 
telephone,  classification  symbols,  control  of  operations  through 
control  boards,  and  all  other  communicating  and  computing 
aids  of  business  administration  are  in  their  veriest  beginnings. 
So  true  is  all  this  that  it  is  generally  admitted  that  the  out- 
standing limitation  to  the  growth  of  the  single  business  unit 
is,  at  the  present  day,  the  limitation  of  administrative  talent 
and  technique. 


AN   EVALUATION   OF   SPECIALIZATION  199 

In  cooperation  through  exchange  the  significant  element  is 
the  market.  Speciahzation  can,  as  we  know,  wisely  be  carried 
on  only  as  far  as  the  market  will  justify.  We  may  then 
approach  the  subject  of  the  limitation  imposed  by  the  market 
by  asking  this  question  :  what  factors  make  for  a  large  market  ? 

First  of  all  there  is  the  problem  of  the  number  of  people  who 
can  be  reached  and  the  range  of  their  desires  and  their  pur- 
chasing ability  after  they  have  been  reached.  Consideration 
of  such  a  problem  involves  consideration  of  the  rate  of  increase 
of  population ;  of  the  facilities  for  communication  and  trans- 
portation which  make  for  the  accessibility  of  large  areas ;  of 
the  richness  of  the  intellectual  life  of  the  region ;  and  of  the 
range  and  productivity  of  their  economic  institutions.  Speaking 
in  general  terms,  the  last  hundred  years  have  witnessed  a  great 
extension  of  the  market.  Specialization  may  be  carried  to 
great  lengths  as  far  as  the  size  of  the  market  is  concerned. 

There  is  one  factor  of  the  extent  of  the  market  which  we 
have  been  assuming  in  our  discussion  thus  far  and  which  should 
now  be  emphasized.  A  broad  market  and  wide  exchange  can 
occur  only  when  satisfactory  instruments,  or  implements,  of 
exchange  have  been  made  available.  In  the  old  days  of  barter 
economy,  difficulties  of  exchange  were  very  great.  A  very 
important  one  was  the  so-called  double  coincidence  of  barter. 
One  person  bartering  with  another  must  happen  to  have  the 
article  the  other  desired,  and  must  himself  happen  to  desire  the 
other's  commodity.  Not  only  this,  these  commodities  must 
happen  to  be  divisible  into  "  barterable  "  units,  so  to  speak. 
The  owner  of  a  horse  might  wish  to  barter  for  a  hat,  and  the 
owner  of  the  hat  might  wish  the  horse,  but  with  one  horse  worth 
a  hundred  hats  it  is  not  probable  that  exchange  would  occur,  for 
presumably  the  horse's  owner  does  not  wish  one  hundred  hats. 

The  coming  in  of  the  use  of  money  furnishes  a  common 
denominator,  a  general  translator  of  the  values  of  commodities. 
When  it  became  possible  for  the  horse's  owner  to  trade  his 
horse  for  three  hundred  pieces  of  money,  and  then  take  three 
of  those  pieces  and  buy  a  hat,  exchange  had  been  tremendously 


200  OUR  ECONOMIC   ORGANIZATION 

facilitated.  One  writer  has  well  said,  "  Money  is  an  oil  on  the 
machinery  of  exchange."  Surely  it  is  evident  that  had  barter 
continued  to  be  our  method  of  exchange  —  had  money  economy 
never  emerged  —  markets  could  never  have  become  wide,  and 
specialization  could  never  have  been  carried  far.  In  a  later 
study  we  shall  see  how  the  use  of  money  in  exchange  is  related 
to  the  use  of  credit  and  to  the  use  of  a  whole  network  of  financial 
institutions  which  render  various  services  —  among  them  the 
facilitation  of  exchange. 

Closely  connected  with  the  facilitators  of  exchange  —  being 
indeed  but  another  aspect  of  the  same  matter  —  is  what  we 
call  market  organization.  Market  organization  is  not  easy  to 
define,  for  our  society  is  so  much  a  market  society  that  in  a 
very  real  sense  every  specialist  is  a  part  of  our  market  organ- 
ization. There  are,  however,  certain  business  units  that 
specialize  in  marketing  operations  as,  for  example,  the  exchanges, 
wholesalers,  retailers,  jobbers,  and  brokers.  These  business 
units,  together  with  the  other  business  units  (such  as  banks, 
railroads,  and  insurance  companies)  which  serve  them  all, 
operate  in  terms  of  the  business  and  social  environment  of  the 
day.  This  bewildering  complex  is  sometimes  called  our 
commercial  or  market  organization.  Clearly,  an  effective 
market  organization  facilitates  exchange  and  makes  for  a 
wider  market.  An  ineffective  market  organization  cramps 
exchange  and  leads  to  a  cramped  market. 

Everything  considered,  what  we  may  expect  concerning  the 
growth  of  specialization  in  the  future  is  quite  clear.  Its  gains 
are  many  and  forces  checking  its  growth  are  neither  numerous 
nor  powerful.  Probably  the  greatest  single  limitation  lies 
in  undeveloped  administrative  technique.  That  is  to  say, 
managers  of  business  units  still  have  much  to  learn  concerning 
how  to  organize  and  manage  large  businesses  made  up  of 
specialists.  But  the  lack  of  development  in  this  field  of 
administration  is  to  be  ascribed  to  its  newness  and  not  to  any 
insuperable  difficulties.  Our  society  seems  certain  to  become 
more  and  more  specialized. 


AN  EVALUATION   OF  SPECIALIZATION  201 

Interdependence  results  from  specialization.  —  The  out- 
standing result  of  specialization  is  greater  productivity  than 
formerly.  It  is  worth  while  to  point  out  some  further  results 
if  only  to  make  us  alert  for  their  recurrence  in  later  chapters. 

The  interdependence  flowing  from  speciaUzation  is  worth 
taking  up  again  that  it  may  be  seen  as  a  whole.  As  our  economic 
organization  has  become  more  and  more  speciaUzed  it  has 
grown  more  and  more  interdependent.  One  sees  quite  vividly 
the  degree  of  his  interdependence  when  he  thinks  about  the 
answer  to  such  questions  as  these.  For  how  many  of  the  clothes 
which  you  are  wearing  are  you  dependent  upon  the  efforts  of 
some  one  else  ?  How  many  of  the  articles  of  furniture  in  your 
home  were  made  by  others?  For  what  proportion  of  things 
eaten  at  your  table  is  the  productive  work  of  other  persons 
responsible  ?  How  many  persons  took  part  directly  or  indirectly 
in  producing  the  chair  in  which  you  are  sitting  or  the  shoes 
which  you  are  wearing?  How  many  articles  which  you  ate 
at  your  last  meal  came  from  outside  your  city  and  how  many 
from  outside  your  own  country? 

The  dependence  of  persons  upon  other  persons  is  not  the 
only  form  of  interdependence  which  follows  specialization.  We 
have  seen  that  our  business  units  and  our  specialized  middlemen 
are  dependent  upon  ranges  or  series  of  other  specialists.  There 
is  thus  interdependence  between  industries,  trades,  and  pro- 
fessions. Then,  too,  our  industries  are  interdependent  because 
they  all  rely  upon  the  same  limited  supply  of  social  resources, 
land,  labor,  capital,  and  acquired  knowledge.  The  utihzation 
of  any  part  of  this  energy  at  a  given  time  for  one  industry  or 
for  one  purpose  affects  the  amount  that  is  available  for  other 
industries  or  other  purposes.  The  growth  or  decline  of  one 
pursuit  is  thus  a  matter  affecting  in  various  ways  the  welfare 
of  all  others. 

The  interdependence  of  our  business  processes  is  well  illus- 
trated by  the  interdependence  of  prices.^  The  prices  which 
retail  merchants  charge  for  consumer's  commodities  are  related 

•  W.  C.  Mitchell,  Business  Cycles,  pp.  27-31. 


202  OUR  ECONOMIC   ORGANIZATION 

to  each  other  through  the  principle  of  substitution.  An  ad- 
vance in  the  price  of  one  commodity  usually  creates  an  in- 
creased demand  for  available  substitutes  and  thus  favors  an 
advance  in  t-he  prices  of  these  substitutes.  The  prices  of  goods 
sold  to  consumers  are,  of  course,  related  not  only  to  the  demands 
of  consumers  but  also  to  the  prices  the  merchants  had  to  pay 
the  producers.  The  prices  charged  the  merchants  by  these 
producers  are  related  not  only  to  the  demands  of  the  merchants 
(who  reflected  the  consumer's  demands)  but  also  to  the  cost  of 
the  various  goods  the  producers  employ  in  manufacture  and 
distribution.  This  goes  back  to  raw  materials,  and  the  prices 
of  raw  materials  are  related  intimately  to  the  prices  of  labor, 
current  supplies,  machinery,  buildings,  land,  loans,  leases,  etc., 
which  the  farmers,  miners,  lumbermen,  etc.,  employ.  The 
price  of  labor  (wages)  is  intimately  related  to  the  prices  of 
consumer's  goods ;  to  the  cost  of  living.  And  most  of  the  less 
tangible  services,  loans,  transportation,  insurance,  are  the 
subjects  of  an  organized  business  traffic,  and  the  prices  charged 
by  the  bank,  the  railway,  and  the  insurance  company  are  sys- 
tematically related  both  to  the  prices  which  these  enterprises 
must  pay  for  their  own  goods,  and  to  the  prices  of  the  wares  dealt 
in  by  the  enterprises  which  borrow  money,  ship  goods,  and 
carry  insurance.  Note  also  that  present  prices  are  affected 
by  prices  of  the  recent  past,  and  by  the  anticipated  prices  of 
the  near  future.  The  price  system  has  thus  no  definable  limits 
in  time  and  its  system  is  an  endless  chain.  This  interde- 
pendent price  system  is  typical  of  the  interdependence  of  our 
whole  business  structure. 

Our  interdependence  has  an  impersonal  character.  —  In 
spite  of  the  fact  that  we  constantly  use  the  work  of  other  people 
and  specialize  in  doing  work  which  is  useful  to  other  people  — 
in  spite  of  the  interdependence  of  modern  society  we  come  in 
little  personal  touch  with  our  fellow  cooperator.  Our  relation- 
ships are  impersonal.  Under  the  old  gild  system,  by  way  of 
contrast,  the  master  craftsman  and  his  workmen  living  in  the 
same  house  ate  at  the  same  table  and  knew  intimately  the 


AN   EVALUATION   OF   SPECIALIZATION  203 

personal  affairs  of  one  another.  The  craftsman  who  made 
shoes,  clothing,  or  implements  for  a  buyer  in  the  same  locality 
frequently  made  them  for  some  one  with  whom  he  had  a  per- 
sonal acquaintance  and  who  would  take  a  personal  interest  in 
the  goods  which  he  had  purchased.  On  the  other  hand,  the 
speciahzed  emploj^ee  in  a  modern  factory  does  not  know  his 
employer  and  may  be  known  to  those  in  authority  only  by 
number.  He  cannot  even  guess  who  will  wear  the  shoes  that 
he  helps  to  make.  The  farmer  who  produces  food  supplies 
does  not  know  the  city  dwellers  who  consume  them,  nor  can 
producer  or  consumer  in  such  a  relationship  feel  a  personal 
interest  in  one  another.  In  hundreds  of  other  ways,  some  of 
which  we  shall  consider  more  fully  later  on,  has  specialization, 
combined  with  other  features  of  our  economic  system,  made  for 
impersonality. 

Specialization  has  resulted  in  a  more  speculative  society.  — 
Specialization  has  made  business  undertakings  more  speculative. 
It  has  brought  new  risks.  Under  it  one  producer  is  dependent 
upon  others  so  that  he,  blameless  himself,  may  suffer  loss  be- 
cause of  the  failure  of  some  one  else  to  carry  on  his  task  suc- 
cessfully. (See  Study  XXI.)  Then,  too,  in  a  speciahzed  society, 
production  takes  place  for  an  anticipated  demand  of  the  future. 
It  takes  months  for  a  good  to  be  made  —  for  the  materials  to 
pass  through  the  hands  of  the  various  series  of  specialists  and 
meantime  the  demand  may  have  disappeared.  We  shall  get 
a  more  detailed  view  of  the  risks  that  arise  from  specialization  in 
Study  XXI,  where  we  study  the  work  of  the  modern  risk-taker 
or  business  enterpriser. 

PROBLEMS 

1.  What  advantages  to  society  as  a  whole  flow  from  specializa- 
tion? In  answering  this,  were  you  thinking  of  territorial  specializa- 
tion, division  of  labor  proper,  specialization  of  capital,  specialization 
of  management,  or  specialization  of  business  units  ? 

2.  Give  three  illustrations  of  the  way  in  which  division  of  labor 
saves  the  time  of  the  worker  and  makes  possible  a  better  utiUzation  of 
equipment. 


204  OUR   ECONOMIC   ORGANIZATION 

3.  "Division  of  labor  promotes  invention  by  standardizing  a 
process  and  thus  pointing  out  how  it  may  be  taken  over  by  a  machine." 
"Division  of  labor  hinders  invention  by  deadening  human  faculties." 
With  which  quotation  do  you  agree  ?     Can  both  be  true  ? 

4.  "Specialization  makes  possible  a  greater  quantity  and  better 
quality  of  goods."  "Better  goods  were  produced  when  the  same  man 
performed  all  the  steps  involved  in  making  them."  Which  quotation 
do  you  tliink  correct? 

5.  Make  a  list  of  the  advantages  of  division  of  labor  to  the 
managing  owner  of  a  business.  Are  there  cases  where  these  ad- 
vantages to  the  owner  might  also  be  advantages  to  the  individual 
worker  ?  Are  there  cases  where  they  might  be  disadvantages  to  the 
worker? 

6.  Can  you  cite  any  possible  disadvantages  which  may  come  to 
the  managing  owner  of  a  business  through  his  using  highly  specialized 
workers  ? 

7.  Cooperation  of  specialists  is  advantageous  because  it  enables 
us  (a)  to  enjoy  goods  which  we  could  not  ourselves  produce,  (6)  to 
enjoy  a  larger  quantity  of  many  goods,  and  (c)  to  enjoy  a  better 
quality  of  goods.     Demonstrate  and  illustrate  each  of  these  points. 

8.  In  what  ways  does  specialization  "greatly  facilitate  the  ac- 
quisition and  retention  of  the  sum  of  knowledge,  wliich  is  transmissible 
from  one  generation  to  another"? 

9.  "Whatever  unpleasant  effects  the  division  of  labor  may  have 
as  regards  monotony  and  strain,  they  may  be  counteracted  and  miti- 
gated."    Just  how?    Is  the  quotation  true ? 

10.  "In  the  case  of  speciahzation  of  management  increased  produc- 
tivity comes  from  the  same  forces  which  cause  it  in  the  division  of 
labor  proper."     Explain. 

11.  Can  you  hst  any  disadvantages  which  may  come  to  society 
from  division  of  labor  proper?     From  territorial  specialization? 

12.  Draw  up  in  parallel  columns  the  advantages  and  the  disadvan- 
tages which  you  think  the  modern  specialized  worker  in  a  cotton  mill 
has  secured  from  specialization. 

13.  Why  is  it  that  a  country  store  keeps  a  little  of  everything  while 
some  city  stores  deal  only  in  single  "  lines  "  such  as  shoes,  or  china, 
or  sporting  goods  ? 


AN   EVALUATION   OF   SPECIALIZATION  205 

14.  In  a  shoe  manufacturing  plant  specialization  is  carried  to  great 
lengths.  In  a  shoe  repair  shop  specialization  is  not  carried  to  very 
great  lengths.     How  do  you  account  for  this? 

15.  "Farmers  are  behind  the  times.  They  do  not  make  use  of 
specialization.  The  result  is  small  production  of  goods  and  high 
prices."     Comment  on  tliis  statement. 

16.  "The  outstanding  Umitation  to  specialization  to-day  is  the 
hmitation  of  administrative  talent  and  technique."  Just  why  is 
this  a  limitation  to  the  growth  of  speciaUzation  ?  Is  it  a  permanent 
limitation  or  is  it  one  which  can  be  overcome?  Can  you  name  any 
things  which  are  being  done  to  overcome  it  to-day? 

17.  List  the  elements  necessary  for  us  to  have  a  "wide  market." 

18.  Had  money  economy  never  emerged  specialization  could  never 
have  been  carried  far.     Explain  just  why. 

19.  Have  widening  markets  led  to  specialization  or  has  the  in- 
creased productivity  of  specialized  industry  led  to  pressure  for  wider 
markets  ?    Is  it  possible  that  both  tilings  have  occurred  ? 

20.  Is  there  interdependence  between  you  and  other  persons  in 
j'our  town?     Between  you  and  persons  outside  your  town? 

21.  "Every  article  of  a  man's  consumption  is  in  a  sense  competing 
wiih  every  other  article  for  a  larger  share  of  his  expenditure."  Is  this 
true  ?     Is  there  interdependence  in  our  wants  ? 

22.  A  voter  in  an  eastern  city  recently  refused  to  vote  for  a  certain 
man  as  a  representative  to  Congress  unless  he  would  agree  to  intro- 
duce a  bill  abolishing  the  Department  of  Agriculture.  He  argued  in 
this  fashion :  "  This  is  a  manufacturing  district.  Why  should  we  pay 
taxes  for  the  support  of  a  department  which  aids  only  the  farmer?" 
Comment  on  this  vaew. 

23.  In  India  to-day  there  may  be  considerable  loss  of  life  by  famine 
due  to  the  failure  of  crops  In  some  one  district.  How  does  it  come 
that  this  is  more  likely  to  occur  in  India  than  in  America  ? 

24.  "Each  person  or  comnumity  tends  to  gain  from  any  increase 
in  the  economic  efficiency  of  other  persons  or  communities  with  whom 
said  person  or  conmiunity  maintains  economic  relations."     Just  how? 

25.  "If  some  of  the  specialists  in  our  interdependent  societj^  cease 
to  function,  many  others  wiU  be  seriously  affected."  Is  this  state- 
ment true?    If  it  is,  give  three  examples. 


206  OUR   ECONOMIC   ORGANIZATION 

26.  "One  evil  of  interdependence,  and  one  that  is  commonly  over- 
looked, is  the  fact  that  the  stamina  of  individuals  is  weakened  by  so 
much  leaning  on  others."     Is  this  true? 

27.  "There  is  a  primitive  law  of  reciprocity  in  our  modern  inter- 
dependent society.  Interdependence  implies  that  each  shall  perform 
some  function  economically  and  well."     Explain  and  give  illustrations. 

28.  "The  fundamental  grievance  of  groups  or  classes  against  other 
groups  or  classes  in  modern  society  is  that  the  supposed  offenders  are 
violators  of  this  primal  law  of  reciprocity."  Explain  and  give  illus- 
trations. Is  there  here  a  partial  explanation  of  the  distrust  between 
labor  and  capital? 

29.  "Our  specialized  society  is  shot  through  with  impersonal  re- 
lations."    Explain  what  is  meant  and  give  five  illustrations. 

30.  "If  the  world  were  populated  by  hermits,  each  home  would 
practically  be  a  world  by  itself  having  nothing  to  do  with  other  homes." 
Would  there  be  interdependence  in  such  a  world  ? 

31.  "A  football  celebration  in  which  windoM^s  are  broken  may 
harm  householders  but  it  is  a  good  thing  for  labor  for  it  gives  employ- 
ment." Prove  or  disprove  this  on  the  basis  of  the  thought  suggested 
by  our  interdependence. 

32.  "Such  events  as  the  Galveston  flood  are  not  unmixed  evils,  for 
they  give  employment  to  labor."  What  do  you  think  of  this  state- 
ment? 

33.  "All  labor  is  noble."  "Every  calUng  is  sacred."  "There  is 
little  use  in  trying  to  distinguish  between  sacred  and  secular  callings." 
What  light  does  the  great  cooperation  of  our  modern  society  throw 
on  these  statements  ? 

34.  Make  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  373-377.  Selections 
148-155. 

Bureau  of  Education,  Lessons  in  Community   and  National  Life: 
Series  B,  Lesson  B-12,  Powell, "  Impersonality  of  Modern  Life." 


STUDY  XIII 

MACHINE  INDUSTRY  — AN  EXAMPLE  OF  MODERN 
TECHNOLOGY 

PURPOSES  OF  THIS  STUDY : 

1.  To  see  that  there  have  come  into  use  in  industry  methods  which  we 

call  a  new  technology. 

2.  To  see  how  one  of  these  methods  —  machine  industry  —  helps  in 

want-gratification. 

3.  To  observe  the  growth  and  pervasiveness  of  machine  industry. 

The  new  technology  and  the  rise  of  machine  industry.  —  "  The 
whole  history  of  human  civilization  is  a  history  of  successive 
inventions  and  larger  mastery  of  natural  forces.  Our  present 
advantages  come  not  from  our  superior  minds  but  from  the 
fact  that  each  generation  has  added  something  to  the  stock  of 
devices  that  men  have  learned  to  employ."  We  caught  a  hint 
of  this  situation  in  our  discussion  of  specialization.  (See  p. 
194.)  In  this  lesson  we  shall  try  to  see  in  greater  detail  man's 
indebtedness  to  technology. 

Primitive  man  was  not  without  his  devices  to  aid  in  the 
struggle  to  gratify  wants.  Indeed,  he  possessed  some  of  the 
most  remarkable  ones  we  know  about.  He  had  fire,  the  bow 
and  arrow,  pottery,  weaving  devices,  boats,  and  domestic 
animals,  and  was  able  to  make  use  of  certain  metals.  This 
list  may  seem  to  us  to-day  a  small  one  but  its  importance  may 
be  seen  by  asking  ourselves  how  early  man  would  have  fared 
without  them. 

An  outstanding  characteristic  of  all  the  technical  devices 
from  the  time  of  primitive  man  down  to  the  seventeenth  century 
is  this :  they  were  not  based  on  any  scientific  knowledge  of 
underlying   principles ;     they   were   the   result,    sometimes   of 

207 


208  OUR  ECONOMIC   ORGANIZATION 

accident,  sometimes  of  experimentation  through  trial  and 
error,  but  they  were  not  "  thought  out "  as  a  modern 
scientist  would  think  them  out.  They  grew  slowly  and  pain- 
fully out  of  experience  and  were  handed  down  from  one  gen- 
eration to  another,  accumulating  over  many  centuries  of 
time. 

The  last  three  hundred  years  have  witnessed  a  very  different 
situation.  Modern  experimental  science  which  developed 
fundamental  natural  laws  began  in  the  seventeenth  century, 
and  from  that  time  on  new  methods  could  be  "  thought  out  " 
through  the  application  of  these  laws.  Sometimes  we  say  that 
this  is  a  change  from  "  rule  of  thumb  "  to  "  rule  of  law."  What- 
ever we  choose  to  call  it,  it  marked  the  beginning  of  a  great 
forward  movement  in  the  application  of  science  to  the  needs  of 
man.  It  would  be  hopeless  to  try  to  enumerate  these  ap- 
plications. They  include  all  that  is  embraced  in  such  technical 
knowledge  as  economic  geology,  economic  and  commercial 
geography,  industrial  chemistry,  mechanical  engineering,  min- 
ing engineering,  scientific  agriculture  —  to  make  only  the 
beginnings  of  a  catalogue.  ''Modern  technology"  is  the  in- 
clusive term  for  them. 

We  shall  not  have  time  to  study  all  of  the  sciences  in  this 
work.  Other  studies  give  themselves  up  to  certain  of  them. 
We  shall  study  only  one  form  of  this  modern  technology  — 
machine  industry.  But  we  ought  to  remember  that  machine 
industry  is  selected  for  study  as  an  example,  and  that  to  it  must 
be  added  the  results  of  all  sciences  if  one  is  really  to  appreciate 
the  significance  of  modern  technology.  We  have  already  seen 
what  we  call  the  beginnings  of  machine  industry  in  our  study 
of  the  Industrial  Revolution.  We  know  that  the  machine  came 
in  "  suddenly,"  if  we  do  not  count  the  long  period  of  preceding 
preparation.  A  generation  was  enough  in  which  to  revolu- 
tionize the  cloth-making  industry ;  a  half  a  century  spanned  the 
revolution  in  many  other  industries  ;  a  century  sufficed  to  bring 
all  the  western  part  of  the  world  under  the  influence  of  the 
machine,  and  to  see  it  applied  in  manufacture,  in  agriculture, 


AN  EXAMPLE   OF  MODERN  TECHNOLOGY        209 

in  mining,  in  transportation  and  communication.  The  ac- 
companying diagram  shows  how  brief  has  been  the  reign  of 
the  machine.  We  shall  do  well  to  remember  that  its  reign  has 
been  brief  when  we  come  to  our  study  of  social  control  of 
machine  industry. 

What  a  machine  is.  —  We  should  learn  to  appreciate  the 
difference  between  tools  such  as  the  hammer,  the  auger,  the 
chisel,   the  carpenter's  plane,   and  the  needle,   and  machines 


2000  B.C. 


BIRTH  OF  CHRIST 


TIME  DURJNG  WHICH  THE  HAND  SPINDLE  WAS  THE  ONLY  FORM 
OF  SPINDLE  KNOWN. 


=  SPINNING  WHEEL  ALSO  KNOWN. 


»  STEAM  HAS  BEEN  APPLIED  TO  SPINNING. 

From  First  Report  of  Labor  Musenm,  Hull  Bouse,  Chicago 

The  Brief  Life  of  Machine  Industry 

Had  you  ever  thought  how  short  a  time,  measured  against  human  history, 
we  have  had  our  present-day  methods  of  production? 


such  as  the  steam  trip  hammer,  the  boring  mill,  the  metal 
shearer,  the  metal  planer,  and  the  sewing  machine.  If  you 
will  think  over  the  uses  of  the  tools  here  mentioned  you  will 
realize  that  they  are  guided  in  their  operations  by  the  human 
hand.  If  now  you  will  look  at  the  machines  mentioned  you  will 
see  that  these  same  tools,  or  their  equivalents,  are  set  up  in 
a  mechanism  and  are  guided  and  controlled  by  that  mechanism 
rather  than   by   the   human   hand.     Just  here   we  have   the 


210  OUR  ECONOMIC   ORGANIZATION 

essential  difference  between  a  tool  and  a  machine,  and  from  this 
difference  follow  many  significant  consequences. 

While  the  foregoing  states  the  outstanding  difference  between 
tools  and  machinery, 

"  All  fully  developed  machinery  consists  of  three  essentially  different 
parts,  the  motor  mechanism,  the  transmitting  mechanism,  and  finally 
the  tool  or  working  machine.  The  motor  mechanism  is  that  which 
puts  the  whole  in  motion.  It  either  generates  its  own  motive  power, 
like  the  steam  engine,  the  caloric  engine,  the  electro-magnetic  machine, 
etc.,  or  it  receives  its  impulse  from  some  already  existing  natural 
force,  Uke  the  water-wheel  from  a  head  of  water,  the  windmill  from 
wind,  etc.  The  transmitting  mechanism,  composed  of  fly-wheels,  shaft- 
ing, toothed  wheels,  pulleys,  straps,  ropes,  bands,  pinions,  and  gearing 
of  the  most  varied  kinds,  regulates  the  motion,  changes  its  form  where 
necessary,  as  for  instance  from  linear  to  circular,  and  divides  and  distrib- 
utes it  among  the  working  machines.  These  first  two  parts  of  the 
whole  mechanism  are  there  solely  for  putting  the  working  machines  in 
motion,  by  means  of  which  motion  the  subject  of  labor  is  seized  upon 
and  modified  as  desired.  The  tool  or  working  machine  is  that  part 
of  the  machinery  with  which  the  industrial  revolution  of  the  eighteenth 
century  started.  And  to  this  day  it  constantly  serves  as  such  a  start- 
ing-point, whenever  a  handicraft,  or  a  manufacture  is  turned  into  an 
industry  carried  on  by  machinery. 

"An  organized  system  of  machines,  to  which  the  motion  is  com- 
municated by  the  transmitting  mechanism  from  a  central  automaton, 
is  the  most  developed  form  of  production  by  machinery.  Here  we 
have,  in  the  place  of  the  isolated  machine,  a  mechanical  monster  whose 
body  fills  whole  factories,  and  whose  demon  power,  at  first  veUed  under 
the  slow  and  measured  motions  of  his  giant  limbs,  at  length  breaks  out 
into  the  fast  and  furious  whirl  of  his  countless  working  organs."  ^ 

Wherein  the  machine  helps.  —  The  modern  machine  is, 
then,  a  mechanical  means  of  operating  tools  which  are  not 
essentially  different  from  those  used  by  a  craftsman.  We  make 
ever  greater  use  of  the  machine  to-day  because  it  means  in- 
creased power  of  production.  Whence  comes  this  increased 
power? 

'  Adapted  from  Karl  Marx.  Capital,  I,  pp.  407-417. 


AN   EXAMPLE   OF  MODERN  TECHNOLOGY 


211 


(1)  The  machine  harnesses  for  our  use  great  natural  forces. 
The  more  obvious  illustrations  of  this  contribution  by  the  ma- 
chine are  seen  in  the  harnessing  of  the  winds  by  the  windmill ; 
of  the  waterfall  by  the  water  wheel;  of  electricity  by  the 
dynamo ;   and  of  the  expansive  power  of  gases  by  the  steam 

Sources  of  Power  i 
Human 


Power 


Muscular 


[  Animal 


Wind 


Horses 
Mules 

Asses 
Oxen 
J  Buffaloes 
Yaks 

Elephants 
Camels 
Llamas 
Dogs 


Mechanical 


Streams 
Water    \  Waves 
Tides 
J  Steam  engines 
1  Internal-combustion  engines 
Solar  engines 


Fuel 


and  internal-combustion  engines.  But  these  are  only  the  more 
obvious  illustrations.  The  lever,  the  pulley,  the  inclined  plane, 
the  screw,  and  the  wedge  —  tools  in  themselves  —  when  com- 
bined in  modern  machines  unlock  mechanical  powers  of  tre- 
mendous service  to  man.  (2)  It  is  not  merely  that  these 
natural  forces  are  harnessed ;  they  are  harnessed  in  such  a  way 
as  to  bring  giant  forces  to  bear  at  any  point  of  need.  Picture 
a  group  of  people  aided  by  simple  tools  alone  trying  to  bring 
to  bear  on  "  the  vital  square  inch  "  of  surface  the  force  exerted 
by  the  modern  steam  hammer,  or  picture  them  with  simple 
tools  trying  to  roll  a  sheet  of  armor  plate,  and  a  vision  is  secured 
of  the  forces  modern  machinery  can  bring  to  bear  on  points  of 
need.  (3)  And  the  machine  works  with  a  continuity,  regularity, 
and  speed  which  the  human  organism  cannot  hope  to  equal. 
Machines  are  untiring ;    they  can  work  day  and  night  without 

'  Carver,  Principles  of  Political  Economy,  p.  141. 


212 


OUR   ECONOMIC   ORGANIZATION 


relief  or  rest.  They  perform  the  same  operation  over  and  over 
with  a  regularity  that  no  human  hand  can  achieve.  Their 
speed  is  limited  only  by  the  speed  of  the  driving  mechanism 
(which  through  the  application  of  the  principle  of  the  lever  is 
almost  unlimited)  and  the  strength  of  the  materials  of  which 
they  are  composed.  Man  is  no  rival  of  the  machine  in  its  own 
sphere.     (4)  And  this  sphere  includes  an  uncanny  certainty 


^  '--is^' 


^^■^^^M-Z 


^ 


.    ") 


t  ^"^"^i^ 


7 'i    ^/T^i 


Courtesy  Iruernaiiunal  Harvtsler  (Jo.  oj  America 

Hand  Methods  in  1885 

Compare  this  picture  with  the  one  on  page  213  where  similar  work  in  a 
modern  plant  is  shown.  Notice  particularly  the  difference  in  the  number 
of  workers. 

of  direction  and  an  exceeding  fineness  and  delicacy  of  touch. 
No  person  could  place  letters  so  precisely  in  line  or  could  so 
accurately  space  the  Unes  as  does  the  properly  adjusted  type- 
writer ;  few  hands,  aided  only  by  simple  tools,  could  perform 
the  delicate  operations  of  watch-making  and  even  these  few 
hands  could  not  do  so  sufficiently  accurately  to  make  possible 
that  commonplace  of  machine  industry,  —  "  interchangeable 
parts." 


AN  EXAMPLE  OF  MODERN  TECHNOLOGY 


213 


"In  the  last  resort  all  our  productive  efforts  amount  to  shiftings 
and  combinations  of  matter.  But  the  natural  forms  of  matter  are 
often  so  infinitely  large,  often  so  infinitely  fine,  that  hmnan  hands  are 
too  weak  or  too  coarse  to  control  them.  We  are.  as  powerless  to  over- 
come the  cohesion  of  the  wall  of  rock  when  we  want  building  stone  as 
we  are,  from  carbon,  nitrogen,  hydrogen,  oxygen,  phosphor,  potash, 
etc.,  to  put  together  a  single  grain  of  wheat.  But  there  are  other 
powers  which  can  easily  do  what  is  denied  to  us,  and  these  are  the 


Courtesy  Inttrnatiunal  Harvester  Co.  of  America 

Shaftinq  Room  in  McCormick  Reaper  Works 

The  automatic  screw  machine  room  where  rows  of  automatic  machines 
shape  and  fashion  innumerable  small  but  essential  parts  of  harvesting 
machines. 

powers  of  nature.  There  are  natural  powers  which  far  exceed  the 
possibiUties  of  human  power  in  greatness,  and  there  are  other  powers 
in  the  microscopic  world  which  can  make  combinations  that  put  our 
clumsy  fingers  to  shame.  If  we  can  succeed  in  making  those  forces 
our  allies,  in  the  work  of  production,  the  limits  of  human  possibility 
will  be  infinitely  extended.     And  this  we  have  done."  ^ 

Our  modern  technological   method  of    production   is  often 
called  the  roundabout  method  of  production.     It  is  roundabout 

I  Adapted  from  Eugen  von  Bohm-Bawerk,  The  Positive  Theory  of  Capital,  pp.  18-22. 


214  OUR  ECONOMIC  ORGANIZATION 

because,  instead  of  producing  directly  the  things  which  we  want, 
we  first  create  the  instruments  and  facihties  with  which  to  make 
them.  Plainly  we  do  this  because  roundabout  production 
means  increased  production.  In  fact,  the  roundabout  method 
has  made  it  possible  for  us  to  accomplish  many  things  which  we 
could  not  otherwise  accomplish  at  all.  The  following  is  a 
classical  illustration  of  this  fact. 

"I  am  short-sighted,  and  wish  to  have  a  pair  of  spectacles.  For 
this  I  require  ground  and  polished  glasses  and  a  steel  framework.  But 
all  that  nature  offers  towards  that  end  is  silicious  earth  and  iron  ore. 
How  am  I  to  transform  these  into  spectacles?  Work  as  I  may,  it 
is  as  impossible  for  me  to  make  spectacles  directly  out  of  silicious  earth 
as  it  would  be  to  make  the  steel  framework  out  of  iron  ore.  Here 
there  is  no  immediate  or  direct  method  of  production.  There  is  noth- 
ing for  it  but  to  take  the  roundabout  way,  and  indeed,  a  very  round- 
about way.  I  must  take  silicious  earth  and  fuel,  and  build  furnaces 
for  smelting  the  glasses  from  the  silicious  earth ;  the  glass  thus  obtained 
has  to  be  carefully  purified,  worked,  and  cooled  by  a  series  of  processes ; 
finally,  the  glass  thus  prepared  —  again  by  means  of  ingenious  instru- 
ments carefully  constructed  beforehand  —  is  ground  and  polished  into 
the  lens  fit  for  short-sighted  eyes.  Similarly  I  must  smelt  iron  in  the 
blast  furnace,  change  the  raw  iron  into  steel,  and  inake  the  frame 
therefrom  —  processes  which  cannot  be  carried  through  without  a 
long  series  of  tools  and  buildings,  that,  on  their  part  again,  require 
great  amounts  of  previous  labor.  Thus,  by  an  exceedingly  round- 
about way  the  end  is  attained."  ' 

The  productivity  of  machinery.  —  Probably  the  preceding 
statement  of  wherein  the  machine  helps,  together  with  a  little 
reflection  on  our  part  of  the  time  which  would  bo  involved  in 
making  with  simple  tools  the  products  which  we  now  use  in 
one  day,  would  be  satisfactory  evidence  .to  almost  any  one  that 
the  machine  is  productive ;  that  it  aids  us  greatly  in  our  active 
adaptation  struggle.  And,  indeed,  it  is  satisfactory  proof. 
There  may  be  added  to  it,  however,  certain  striking  bits  of 
evidence. 

•  Eugen  von  Bohm-Bawerk,  The  Positive  Theory  of  Capital,  pp.  18-22. 


AN  EXAMPLE   OF  MODERN  TECHNOLOGY  215 


Courtesy  International  Harvester  Co.  of  America 
Machine  Industry  in  Agriculture  Contrasted  with  Hand  Industry 

The  lower  picture  shows  a  harvest-thresher  in  operation.  This  machine 
cuts,  threshes,  cleans,  and  bags  the  grain  in  one  operation.  Each  outfit 
cuts,  threshes,  cleans,  and  bags^twenty-five  to  thirty  acres  a  day.  The 
upper  picture  shows  men  cutting  grain  with  scythes.  These  three  men  can 
cut  perhaps  four  acres  a  day.     This  is  time  required  for  cutting  alone. 


216 


OUR  ECONOMIC   ORGANIZATION 


One  writer  gives  the  following  table  ^  in  which  he  points  out 
the  number  of  bushels  of  certain  crops  produced  in  given  years 
and  shows,  by  a  computation  which  we  do  not  need  to  repro- 
duce, what  percentage  of  the  crop  might  properly  be  attributed 
to  the  use  of  machines.     In  summarizing  his  table  he  says, 

"The  increased  effectiveness  of  man-labor  power,  when  aided  by  the 
use  of  machinery  as  indicated  by  these  figures,  varies  from  150  per 
cent  in  the  case  of  rye  to  2244  per  cent  in  the  case  of  barley.  From 
this  point  of  view,  a  machine  is  not  a  labor-saving  but  rather  a  product- 
making  device.  Taking  the  percentage  of  labor  saved  as  indicating 
the  average  proportion  of  these  crops  due  to  the  use  of  machinery,  it 
appears  that  the  quantity  of  product  is  almost  five  times  as  great  per 
unit  of  labor  as  it  formerly  was." 


Name 


Barley 
Corn     . 
Cotton 
Hay      . 
Oats 
Potatoes 
Rice 
Rye      . 
Wheat  . 


Crop  of 


1896 
1894 
1895 
1895 
1893 
1895 
1895 
1895 
1896 


Due  to  Use  op 
Machinery 


66,722,384  bu. 
739,242,030  bu. 
4,642,122  bales 

38,276,901  tons 
570,421,543  bu. 
193,534,049  bu. 
122,381,853  lb. 

16,337,275  bu. 
404,438,856  bu. 


Percentage  of 
Product  Dub 
to  Machinery 


95.7 
60.9 
64.8 
81.3 
89.2 
65.1 
72.5 
60.0 
94.5 


The  productive  power  of  machinery  has  been  shown  in 
manufacture  even  more  strikingly  than  in  agriculture.^  The 
following  instances,  though  disconnected  and  taken  at  random, 
show  this  power.  The  best  flour  mill  in  Athens  at  the  time  of 
Pericles  produced  only  two  barrels  of  flour  in  a  day ;  one  of  the 
mills  in  Minneapolis  produces  enough  to  fill  17,000  barrels. 
In  the  early  part  of  the  last  century  a  skilled  workman  could 

•  Adapted  from  H.  W.  Quaintance,  The  Influence  of  Farm  Machinery  on  Production  and 
Labor,  Publications  of  the  American  Economic  Association,  Third  Scries,  Vol.  V. 

'  The  illustrations  given  here  are  taken  from  Lessons  in  Community  and  National  Life, 
passim. 


AN  EXAMPLE   OF  MODERN   TECHNOLOGY 


217 


make  in  a  day  about  thirty  needles ;  at  the  end  of  the  century 
a  girl  with  the  help  of  a  machine  could  make  in  a  day  500,000 
needles.    Ore  vessels  on  the  Great  Lakes,  600  feet  long,  are  loaded 


Underwood  and  Underwood 

Unloading  Ore  from  Lake  Steamers 
Notice  the  vessel  in  the  background  and  the  giant  machine  beside  it. 

with  10,000  tons  of  ore,  in  twenty  minutes,  and  the  same  cargo 
can  be  unloaded  in  three  hours  and  twenty  minutes  by  huge 
machines  called  clam-shell  unloaders.  The  blacksmith  once 
made  nails  by  hand,  now  we  poke  the  end  of  a  long  roll  of  wire 


218 


OUR   ECONOMIC   ORGANIZATION 


into  a  machine,  and  it  rapidly  pulls  in  the  wire  and  drops  out 
nails  by  the  kegful.  Man  first  printed  with  a  little  hand 
press,  but  now  we  feed  the  roll  of  paper  to  a  machine  as  long  as 
a  room,  which  piles  off  thousands  of  newspapers  or  pamphlets 
an  hour.  As  early  as  1800,  twenty-five  people  with  the  aid 
of  the  recently  invented  weaving  machinery  could  do  as  much 


The  Hoe  Double  Octuple  and  Color  Combination  Press 

The  largest  newspaper  printing  press  in  the  world,  capacity  per  hour,  300,000 
papers  of  8  pages,  other  products  at  proportionate  speed.  See  page  7.S  for 
picture  of  primitive  press. 


weaving  as  had  been  done  by  1634  people  fifteen  years  before, 
and  the  one  city  of  Fall  River,  Massachusetts,  now  turns  out 
two  miles  of  cloth  for  every  minute  of  the  working  day.  It  is 
said  that  it  would  require  the  labor  of  more  than  1,000,000,000 
persons  —  as  many  as  there  are  men,  women,  and  children  in 
the  world  —  to  do  the  spinning  and  weaving  that  is  now  done 
by  1,500,000  workers  with  the  aid  of  machinery  in  the  cotton 
industry.     The  productivity  of  machinery  would  stagger  our 


AN  EXAMPLE   OF  MODERN  TECHNOLOGY 


219 


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220 


OUR   ECONOMIC   ORGANIZATION 


imagination  were  it  not  for  the  fact  that  it  has  become  one  of 
our  commonplaces. 

The  growth  of  machine  industry.  —  In  the  hght  of  the  great 
productivity  of  modern  machine  (technological)  industry,  and 
in  the  light  of  our  great  store  of  scientific  knowledge  which 
serves  as  its  background,  it  is  not  surprising  that  machine 
industry  has  come  in  at  a  very  rapid  rate.  For  that  matter, 
it  is  still  coming  in.  The  last  quarter  of  a  century  has  been 
unparalleled  in  the  number  of  inventions  submitted  for  patents, 
—  unparalleled  also  in  the  rate  of  development  of  machines 
already  patented. 

Since  the  modern  machine  is  typically  a  power-driven  machine, 
the  t^ble  on  the  previous  page  showing  the  increase  of  power- 
driven  machinery  used  in  manufacturing  in  the  United  States 
gives  us  some  idea  of  the  continually  increasing  use  of  machinery. 
Note  that  the  table  does  not  tell  the  whole  story ;  for  example, 
it  tells  nothing  of  the  power  used  in  agriculture,  mining,  and 
transportation.  It  shows  only  a  rate  of  growth  in  one  field 
of  activity ;    not  the  total  amount  of  power  used. 


Census  Year 

Total 

Business 
Buildings 
AND  Fixed 

Improve- 
ments 

Railroads 
AND  Other 

Public 
Utilities 

Movable 
Machin- 
ery, Tools 
AND  Im- 
plements 

Miscel- 
laneous 

1850 

2,757 

1,113 

639 

399 

606 

1860 

5,900 

2,160 

1,868 

665 

1,207 

1870 

8,978 

2,975 

3,109 

1,206 

1,688 

1880 

13,636 

4,117 

5,386 

2,373 

1,750 

1890 

19,298 

5,700 

8,366 

2,665 

2,567 

1900 

24,783 

7,250 

10,926 

4,006 

3,231 

1910 

47,961 

13,301 

23,319 

5,995 

5,346 

Index  op 
Quantity 
of  Capi- 
tal Per 
Capita 


85 
133 
105 
205 
270 
321 
412 


The  Estimated  Value  of  the  Supply  of  Active  Capital  in  the 
Continental  United  States,  in  Millions  of  Dollars 

While  machines  are  by  no  means  the  only  form  of  capital 
goods,  they  are  a  very  important  form,  so  important,  indeed, 
that  a  table  showing  the  rate  of  increase  of  capital  goods  in  the 


AN  EXAMPLE   OF  MODERN  TECHNOLOGY  221 

United  States  gives  more  than  a  fair  hint  of  the  rate  of  increase 
of  machinery.  One  of  our  statisticians  ^  has  compiled  a  table 
(shown  on  previous  page)  of  the  growth  of  active  capital  in 
the  United  States  since  1850.  It  shows  not  only  a  great  in- 
crease of  active  capital ;  it  shows  an  increase  much  greater 
even  than  our  increase  in  population.  To  be  specific,  our 
active  capital  has  increased  five  times  as  fast  as  our  population. 
Man  becomes  increasingly  dependent  upon  the  machine. 

The  pervasive  machine.  —  A  statement  of  the  importance 
of  machine  (technological)  industry  to  our  life  to-day  which 
confined  itself  to  mere  figures  giving  the  number  of  patented 
inventions,  or  the  millions  of  horse  power  used,  or  the  mil- 
lions of  dollars  invested  in  active  capital  would  come  far 
from  telling  the  whole  truth.  It  would  not  give  us  an  ade- 
quate sense  of  the  pervasiveness  of  the  machine.  This 
pervasiveness  becomes  evident,  however,  when  we  trace 
through  the  processes  of  production  some  of  our  ordinary 
articles  of  consumption  and  see  that  in  many  cases  they 
reach  us  practically  without  having  been  touched  by  the 
human  hand.  Our  clothes,  our  furniture,  the  houses  in  which 
we  live,  the  food  which  we  eat  are  all  partly,  if  not  wholly,  the 
result  of  machine  work.  The  farmer  of  the  great  grain-growing 
states  breaks  the  natural  sod  with  a  plow  often  drawn  by  steam 
power  or  a  gasoline  motor.  He  breaks  the  coarser  clods  into 
finer  and  more  receptive  soil  with  the  "  pulverizer  "  and  the 
"  harrow."  He  puts  in  the  seed  with  a  "  force  drill  "  or 
"  planter."  When  the  grain  is  matured  it  is  cut  with  a  "  reaper  " 
or  "  header,"  horse  or  power  drawn,  and  the  grain  is  separated 
from  the  straw  by  a  thrashing  machine  which  cleans  hundreds 
of  bushels  a  day.  A  motor  truck  may  convey  this  grain  to  the 
"  elevator  "  in  a  local  town  where  power  machinery  loads  it  into 
cars.  The  railroad,  a  most  important  type  of  machinery, 
conveys  it  to  the  flour  mill,  where  a  whole  series  of  machines 
grind  it  into  flour.  The  railroad  then  moves  it  to  some  city 
where  bakeries,  mechanized  to  the  highest  degree,  transform 

'  W.  I.  King,  The  Wealth  and  Income  oj  the  People  o/  the  United  States,  pp.  43-44. 


222  OUR  ECONOMIC   ORGANIZATION 

it  into  bread.  Motor-driven  vehicles  convey  the  bread  to  the 
retailer  and  to  our  homes. 

Another  example  of  the  pervasiveness  of  machinery  in  pro- 
duction may  be  found  in  following  the  history  of  some  such 
simple  article  as  a  nail.  In  northern  Minnesota,  in  the  Mesaba 
ore  range,  the  explosive  power  of  dynamite  is  used  to  loosen  the 
ore.  A  steam  shovel  running  on  railroad  tracks  is  used  to  scoop 
up  the  material,  as  a  baker  scoops  sugar,  and  to  drop  it  into 
freight  cars.  At  Duluth  and  other  ports  on  Lake  Superior  these 
cars,  wl^ich  have  been  moved  in  long  trains  by  locomotives,  are 
emptied  through  chutes  into  reservoirs  from  which  the  ore  is 
later  poured,  again  through  chutes,  into  the  holds  of  steamers. 
The  steamers  convey  the  ore  to  some  unloading  port  where  it  is 
unloaded  by  machinery  and  again  transferred  to  freight  cars. 
These  cars  are  run  upon  high  trestles  in  the  yards  of  the  steel 
mill  and  from  them  the  ore  is  dropped  into  chutes  from  which 
it  can  be  fed  into  great  furnaces  which  melt  the  iron  from  the 
slag.  After  a  period  of  intense  heat  the  iron  has  run  to  the 
bottom  of  the  furnace,  which  is  then  "  tapped,"  allowing  the 
molten  metal  to  flow  into  great  ladles  so  mounted  on  cars  that 
they  can  be  conveyed  to  other  furnaces  in  which  the  iron  is  so 
manipulated  and  mixed  with  other  materials  as  to  be  converted 
into  steel.  After  this  change  has  been  effected,  and  the  steel 
is  hardened  enough  to  hold  its  form,  it  is  placed  upon  rollers 
which  are  driven  by  such  powerful  machinery  that  they  crush 
and  shape  the  metal  as  though  it  were  putty.  Many  forms 
may  be  made  of  it,  such  as  steel  plates,  railroad  rails,  rods  and 
bars.  Some  will  be  rolled  and  drawn  into  small  rods  from 
which  other  machines,  working  with  the  greatest  rapidity,  chop 
pieces  two  or  three  inches  long,  flattening  one  end  and  pointing 
the  other  and  thus  giving  us  the  familiar  nail.  If  we  followed 
through  the  history  of  almost  any  article  known  to  us  we  would 
find  that  machinery  played  as  great  a  part  in  its  produc^tion. 

The  influence  of  the  machine  extends  even  beyond  the  field 
of  producing  commodities.  Its  occupation  of  one  of  the  fields 
of  our  life  with  its  mechanical,  standardized  ways  of  doing 


AN  EXAMPLE   OF  MODERN  TECHNOLOGY         223 

things  has  reacted  upon  other  fields  and  introduced  there 
a  corresponding  standardization.  Under  simple  conditions, 
such  as  prevailed  in  America  at  the  time  of  the  pioneers,  men 
began  work  in  the  morning  when  they  "  felt  like  it."  If  they 
desired  they  took  a  long  "  nooning."  They  stopped  work  in 
the  evening  when  they  were  tired.  If  they  desired  to  make 
a  journey  they  planned  the  hour  of  departure  to  suit  them- 
selves and  took  the  trip  in  such  stages  as  they  wished.  If 
they  wanted  entertainment,  the  neighborhood  planned  it  and 
met  at  some  convenient  time  for  a  "  sociable,"  a  "  quilting," 
or  a  "  husking  bee."  Workmen  in  those  days  used  the  tools 
which  they  themselves  selected.  They  picked  them  out 
because  they  would  fit  their  hands  or  had  the  right  "  balance." 
They  selected  often  the  materials  with  which  they  worked 
and  made  goods  to  order  for  the  consumer. 

The  machine  has  brought  a  great  change.  Our  lives  are  now 
regulated  by  clocks  which  are  uniform  in  time  throughout  the 
whole  community.  Our  hours  of  going  to  work  are  determined 
for  us  and  are  announced  by  a  factory  whistle  or  a  school  bell. 
We  begin  and  we  stop  according  to  a  plan  devised  by  others  and 
which  operates  with  a  regularity  over  which  we  have  no  control. 
The  tools  the  modern  workmen  use  are  not  such  as  suit  the 
eccentricity  of  individuals.  Tools  have  been  standardized 
and  workmen  are  given  implements  of  uniform  shape  and  gauge. 
Materials  are  also  standardized  in  uniform  grades  which  have 
been  scientifically  calculated  as  best  for  machine  handling. 
The  rate  at  which  these  materials  are  worked  by  the  men  and 
machines  is  in  many  factories  regulated  by  mathematical 
calculations  rather  than  the  wishes  of  the  workers.  When  we 
purchase  goods  we  almost  never  have  them  made  as  we  wish. 
We  buy  the  standard  sizes,  shapes,  weights,  and  grades  which  we 
find  on  the  market.  We  buy  our  shoes  by  size,  our  clothes  by 
number,  our  food  by  the  can  or  loaf  or  box.  We  select  such 
furniture  as  has  been  designed  at  the  factory,  such  automobiles 
as  others  have  planned,  such  toys  as  are  offered  in  the  stores. 
Consumers'  goods  have  been  standardized  and  mechanized. 


224 


OUR  ECONOMIC   ORGANIZATION 


AN  EXAMPLE  OF  MODERN  TECHNOLOGY    225 

Our  coming  and  going  is  no  longer  a  matter  of  will.  We  take 
trains  which  run  on  positive  schedules.  We  catch  street  cars 
at  the  moment  which  it  has  been  planned  they  shall  pass  our 
door.  We  secure  our  news  at  definite  times  when  newspapers 
are  published  or  when  magazines  reach  us.  These  matters 
have  been  schedulized.  Even  our  amusements  are  no  longer 
a  matter  of  our  own  planning  or  creation.  We  attend  the 
theater  at  the  hour  designated  by  some  one  else.  We  find  there 
the  form  of  entertainment  which  has  been  planned  by  another. 
The  concert,  the  circus,  the  ball  game  all  have  their  schedules 
of  time  which  we  must  meet.  If  we  fail  to  fit  our  activities 
to  the  mathematical  and  mechanical  schedules  with  which  we 
are  surrounded  we  cease  to  participate  in  the  life  of  society. 
Much  of  this  standardization  of  modern  life  is  due  to  the  in- 
fluence of  technology  in  industry,  to  the  incoming  of  a  machine 
regime. 

Too  much  must  not  be  claimed  for  modem  technology. — 
While  the  foregoing  is  all  true,  we  must  keep  a  sense  of  propor- 
tion concerning  the  contribution  of  machine  industry  to  our  social 
living.  We  have  by  no  means  reached  a  stage  where  we  may 
assume  that  our  wants  can  be  gratified  with  little  effort  on  our 
part.  The  productive  power  of  the  new  technology  is  indeed 
great,  but  we  must  remember  (1)  that  it  takes  much  expendi- 
ture of  social  energy  to  prepare  the  instruments  of  roundabout 
production ;  and  (2)  that  after  all  there  are  great  areas  in  the 
want-gratification  process  to  which  modern  technology  has  not 
been  largely  applied.  The  economist  Gardner  puts  the  case 
admirably  as  follows  :  ^ 

"We  compare  the  quantity  of  cloth  turned  out  in  a  modem  cotton 
mill  with  the  quantity  which  could  be  turned  out  by  the  same  number 
of  laborers  using  the  spinning  wheel  and  the  hand  loom,  forgetting 
the  labor  which  has  gone  into  the  construction  of  the  mill  and  its 
equipment  and  the  fact  that  a  large  part  of  the  labor  required  for 
the  production  of  cloth  is  employed  on  the  plantation,  where  the 

•  H.  B.  Gardner,  "The  Nature  of  Our  Economic  Problem,"  in  the  American  Economic 
Review  for  March,  1920. 


226  OUR   ECONOMIC   ORGANIZATION 

increase  of  productive  power  has  been  comparatively  slight.  We 
compare  the  cost  of  moving  a  ton  of  freight  by  railway  and  by  wagon, 
but  we  forget  that  owing  to  the  growth  and  expansion  of  population 
and  to  its  congestion  in  limited  areas,  devoted  to  manufactures  and 
trade,  goods  must  be  carried  much  longer  distances  than  a  century 
ago.  We  forget  that  the  increase  in  productive  power  has  not  been 
uniform  throughout  the  whole  field  of  industry,  that  it  has  been  great- 
est in  manufactures,  mining,  and  transportation,  and  least  in  agri- 
culture and  the  handling  of  goods  in  trade,  in  which  branches  of  in- 
dustry is  employed  a  large  part  of  the  labor  required  in  the  production 
of  the  necessaries  of  life.  Furthermore,  our  industrial  development, 
accompanied  as  it  has  been  by  the  growth  of  city  hfe,  has  imposed 
upon  us  the  necessity  of  providing  new  forms  of  wealth  and  services 
not  required  by  a  less  densely  settled  population,  such  as  paved  streets, 
sewage  systems,  costly  plants  for  supplying  water,  police  service,  and 
protection  from  fire,  and  has  immensely  increased  the  difficulty  of 
providing  adequate  housing. 

"The  instances  of  increased  power  of  production  are  striking  and 
appeal  to  the  imagination.  The  offsets  are  not  so  obvious  and  are 
apt  to  be  overlooked." 

Machine  industry  has  given  rise  to  serious  problems.  — 

While  detailed  discussion  must  be  postponed  to  later  chapters, 
we  must  not  leave  this  account  of  the  position  of  machine 
(technological)  industry  in  modern  society  without  calling 
attention  to  the  fact  that  it  has  brought  us  weighty  problems 
to  solve ;  that  society  needs  to  safeguard  itself  against  the 
disadvantages  of  technological  industry  v/liile  continuing  to 
reap  its  advantages.  We  have  already  caught  hints  here  and 
there  that  the  new  technology  places  the  worker  at  some 
disadvantage.  Then,  too,  it  makes  powerfully  for  the  growth 
of  impersonal  relations.  It  increases  the  risks  which  we  have 
seen  to  be  inherent  in  a  specialized  society.  It  has  had  a  part 
in  the  development  of  our  modern  trusts,  and  in  our  great 
inequality  of  possessions.  It  has  been  no  small  cause  of  con- 
centration of  population  in  cities  and  thus  of  the  problems  of 
city  life.  The  problems  of  machine  industry  provide  our  agencies 
of  social  control  rich  and  varied  oi)i)ortunities  for  service. 


AN  EXAMPLE   OP  MODERN  TECHNOLOGY         227 

One  eminent  economist  has  stated  the  matter  thus  : 

"It  is  fair  to  say  that  this  whole  enormous  transformation,  which 
runs  through  the  plan  of  modern  industry  and  through  the  relations 
of  employers  and  employed,  wliich  enters  into  and  perverts  our  po- 
litical  life,  and  even  lowers  the  moral  tone  of  society,  was  inherent 
in  the  original  steam  engine  which  Watt  manufactured  m  Eiigland 
more  than  a  century  and  a  quarter  ago.  It  was  all  brewing  in  that 
tea  kettle  which  as  a  boy  he  sat  and  watched,  noting  the  force  of  the 
steam  as  it  raised  the  lid  and  let  it  fall.  He  saw  that  the  force  might 
be  put  to  great  account  in  driving  such  primitive  machinery  as  he 
knew  of;  but  he  was  far  from  foreseeing  the  transforming  effects  of 
the  innumerable  macliines  which  his  engines  were  destined  to  make 
available.  No  one  for  a  hundred  years  thereafter  realized  their  full 
economic  and  political  consequences.  From  that  economic  apphca- 
tion  of  physical  force  influences  have  followed  which  have  put  an  end 
to  small  industry  and  to  the  old  type  of  democracy.  Can  we  save 
our  democracy  mider  a  new  form?  Can  we  control  the  genie  that 
has  come  out  of  the  box  we  have  opened?  That  depends  on  the 
question  whether,  as  a  people,  we  can  regulate  and  guide  the  gigantic 
forces  that  have  come  into  activity."  ^ 

PROBLEMS 

L  The  club  of  the  cave  man,  the  bow  and  arrow  of  the  Indian, 
the  pitfall  of  the  primitive  hunter  all  harnessed  natural  forces.  What 
natural  forces  did  each  utiUze?  Were  the  club,  the  bow  and  arrow, 
and  the  pitfall  used  as  means  of  producing  goods?  If  so,  why  say 
that  machine  production  is  new  ? 

2.  Assume  that  this  task  is  presented  to  you :  you  are  to  stand 
on  the  bank  of  a  river,  armed  with  a  rifle,  to  shoot  a  large  fish  which 
you  can  see  lying  at  the  bottom.  Consult  your  teacher  of  physics  on 
the  difference  involved  between  (a)  working  this  problem  out  by 
trial  and  error  experimentation,  and  (6)  working  it  out  with  an  under- 
standing of  certain  laws  of  physics.  How  could  this  problem  be  made 
to  illustrate  "rule  of  thumb"  versus  "rule  of  law"? 

3.  Just  why  did  technical  devices  emerge  so  slowly  when  men 
could  not  make  use  of  scientific  knowledge  ? 

«  J.  B.  Clark,  The  Problem  of  Monopoly,  pp.  21-22. 


228  OUR  ECONOMIC   ORGANIZATION 

4.  "The  new  technology."  Write  out  a  paragraph  telling  what 
this  expression  means. 

5.  It  is  said  that  using  machine  industry  as  a  method  of  produc- 
tion enables  us  to  use  natural  forces.  Were  natural  forces  used  in 
industry  prior  to  1750? 

6.  "Science  has  been  made  an  aid  to  industry."  Give  six  illus- 
trations other  than  those  used  m  the  text  of  ways  in  which  science  aids 
industry. 

7.  "The  machine  is  a  tool  plus."     Plus  what? 

8.  Name  four  tools  other  than  those  named  in  the  text  and  four 
machines  which  use  these  tools  or  their  equivalents.  Some  one  has 
said  that  a  machine  is  just  a  mechanical  person  holding  a  tool  with  a 
rigid  grasp.     Does  this  description  satisfy  you? 

9.  Do  we  always  use  tools  or  machinery  in  making  things?  Can 
you  name  a  single  case  of  a  commodity  which  is  produced  "with  our 
bare  hands"? 

10.  Why  is  industry  "with  our  bare  hands"  not  as  productive  as 
tool  industry?  Why  is  tool  industry  not  as  productive  as  machine 
industry? 

11.  Machine  industry  did  not  become  of  its  greatest  use  until 
machines  were  used  to  make  machines.     Why? 

12.  Why  do  nations  strive  to  get  possession  of  iron  mines?  Why 
in  the  recent  war  were  the  various  nations  so  eager  to  occupy  iron 
and  coal  districts? 

13.  To  produce  a  coat  by  machine  methods  requires  that  a  factory 
shall  be  built  for  weaving  the  cloth,  a  factory  for  spinning  thread,  a 
factory  for  making  needles,  a  factory  for  making  buttons,  etc.  It  is 
expensive  to  build  these  factories.  How  can  it  be  possible  that  ma- 
chinery has  resulted  in  lower  prices  for  goods? 

14.  Give  two  illustrations  other  than  the  one  given  in  the  text  of 
machines  which  concentrate  a  great  amount  of  force  upon  a  small 
point ;  of  machines  which  work  witli  greater  rapidity  than  can  human 
beings ;  of  machines  which  work  with  greater  accuracy. 

15.  Roundabout  methods  lead  to  greater  results  than  direct 
methods.    Just  why? 

16.  Roundabout  production  is  not  merely  usually  a  better  way. 
In  the  case  of  certain  goods  it  is  the  only  way.     Illustrate. 


AN   EXAMPLE  OF  MODERN  TECHNOLOGY         229 

17.  "Man  aided  by  machines  can  transfer  wool  from  a  sheep's 
back  to  his  own  in  a  few  hours."  "The  macliine  has  lengthened  the 
time  of  the  productive  process."  Which  of  these  statements  is  cor- 
rect?   Are  both  correct? 

18.  Review  the  ways  in  which  specialized  industry  increased  the 
risks  in  business.  Does  machine  industry  increase  risks  also?  (See 
Study  XXL)      • 

19.  Review  the  ways  in  which  specialization  led  to  impersonality. 
Does  machine  industry  also  lead  to  impersonaUty? 

20.  In  the  early  days  of  machine  industry  factories  were  built 
near  waterfalls,  the  falls  being  utilized  to  turn  a  water  wheel,  which 
was  attached  directly  to  the  machinery  of  the  mill.  How  have  we 
improved  on  this  situation  ? 

21.  Give  illustrations,  showing  that  farming,  transportation,  and 
manufacture  make  more  extensive  use  of  machinery  than  they  did  in 
medieval  times. 

22.  A  business  man  once  said,  "I  prefer  to  employ  machines  rather 
than  persons."     Make  a  list  of  the  reasons  why  he  might  feel  this  way. 

23.  Can  machine  production  be  used  in  making  artistic  goods? 
Goods  in  which  the  personal  tastes  of  the  consiuner  are  very  im- 
portant ?    Wliy  or  why  not  ? 

24.  "Machines  may  be  used  instead  of  physical  labor,  but  they 
can  never  take  the  place  of  mental  labor  except  for  the  most  routine 
kinds."     Is  this  true? 

25.  Do  you  think  that  you  would  fare  well  in  competition  with  a 
machine?  Does  this  question  throw  any  hght  on  the  sort  of  work 
you  want  to  secure  for  your  life  occupation? 

26.  Could  macliine  production  wisely  be  used  unless  the  market 
were  very  large?  Has  the  machine  enlarged  the  market  or  has  the 
widened  market  caused  more  machinery  to  be  used?  Could  both  be 
true? 

27.  Show  how  life  has  been  changed  in  your  community  by  the 
telephone.  By  the  automobile.  By  the  refrigerator  car.  By  the 
locomotive.     Consult  your  parents  or  grandparents. 

28.  What  is  meant  by  saying  that  machine  industry  is  largely  re- 
sponsible for  the  development  of  modern  cities?  Can  you  name  any 
problems  which  have  resulted  from  this  growth  of  cities? 


230  OUR   ECONOMIC   ORGANIZATION 

29.  Can  you  name  any  mechanical  devices  which  help  us  enjoy  our 
leisure  time? 

30.  "Machinery  has  increased  the  possibiUty  of  interchange  of 
goods  and  ideas."  How?  Why  is  it  important  to  have  this  inter- 
change? 

31.  What  inventions  help  unite  people  in  a  nation?  What  inven- 
tions help  bind  country  people  to  city  people  ? 

32.  "Machinery  has  made  life  more  varied."  "Machinery  has 
standardized  Ufe  and  reduced  it  to  routine."  With  which  quotation 
do  you  agree  ? 

33.  When  shoe  machinery  was  introduced,  how  did  it  affect  the 
man  who  made  shoes  at  home  by  hand?  Does  it  seem  to  you  it 
offered  to  people  fewer  or  more  opportunities  to  earn  money?  Were 
there  new  jobs  making  the  new  machinery?  How  did  it  affect  the 
price  of  shoes?  State  other  advantages  and  disadvantages  that  came 
in  with  shoe  machines. 

34.  It  is  said  that  "Machine  methods  have  profoundly  influenced 
our  mental  outlook  and  our  activities.  Modern  life  has  become 
mechanized."  Follow  through  your  activities  for  a  day,  setting  down 
those  which  you  perform  according  to  a  schedule  planned  by  others. 
Set  down  those  in  which  you  are  entirely  free  to  do  as  you  please. 
How  does  your  life  compare  in  this  respect  with  that  of  Daniel  Boone? 

35.  Make  an  outline  of  the  main  points  of  this  lesson. 

Refekences  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  417-423,  Selections 
157-170. 

Bureau  of  Education,  Lessons  in  Community  and  National  Life: 
Series  A,  Lesson  A-8,  Lyon,  "  The  Rise  of  Machine  Industry." 
Series  B,  Lesson  B-9,  Jones,  "How  Men  Made  Heat  to  Work." 

Lesson  B-10,  Reavis,  "Telephone  and  Telegraph." 
Series  C,  Lesson  C-9,  Thomas,  "  Inventions." 

Lesson  C-10,  Smith,  "  Iron  and  Steel." 

Lesson  C-12,  Mirick,  "  Patents  and  Inventions." 


STUDY  XIV 
MACHINE  INDUSTRY  AND  INDIRECT  COSTS 

PURPOSES  OF  THIS  STUDY: 

1.  To  understand  the  meaning  of  direct  and  indirect  costs. 

2.  To  study  some  of  the  far-reaching  effects  of  the  presence  of  indirect 

costs  in  technological  industry. 

Direct  and  indirect  costs.  —  Technological  industry  has 
raised  many  problems.  These  problems  arise  out  of  no  one 
single  factor  and  it  would  be  misleading  to  treat  them  as  if 
they  did.  There  is,  however,  one  factor  of  very  great  impor- 
tance which  we  can  take  up  for  study  at  this  time.  It  is  the 
presence  of  indirect  costs  in  technological  industry.  We  can 
get  an  understanding  of  indirect  costs  and  their  effect  by  begin- 
ning with  a  simple  illustration. 

Recently  a  certain  hotel  manager  made  an  investigation  to 
determine  what  price  he  should  properly  charge  for  his  rooms. 
He  reaUzed  that  there  should  be  some  relation  between  his 
charges  to  guests  and  his  own  costs.  He  set  out,  therefore, 
to  find  out  just  what  his  costs  were  in  providing  accommoda- 
tions. He  thought  this  would  be  easy.  He  thought  he  would 
need  only  to  find  his  total  expenses  by  adding  together  such 
elements  of  cost  as  rent,  light,  heat,  service  of  janitors,  porters, 
and  maids,  and  to  divide  this  by  the  number  of  rooms  in  the 
hotel.  In  this  way  he  believed  he  could  determine  just  what 
he  ought  to  charge  a  guest. 

He  had  not  gone  far  with  his  investigation,  however,  before 
he  found  that  the  matter  was  not  so  simple.  He  found  that 
certain  elements  of  cost  remained  the  same  throughout  the  year 
but  that  others  varied  according  to  the  number  of  guests  he  had 
—  according  to  the  volume  of  business.     For  example,  he  paid 

231 


232  OUR  ECONOMIC   ORGANIZATION 

an  annual  rental  for  the  hotel  which  he  operated.  This  cost 
remained  constant  no  matter  how  many  guests  he  entertained. 
The  same  was  true  of  the  taxes  he  paid.  As  he  read  books 
which  discussed  accounting  matters,  he  found  that  costs  which 
remained  constant  notwithstanding  changes  in  the  volume  of  the 
business  were  called  "  constant  "or  "  overhead  "  or  ''  indirect  " 
or,  sometimes,  "  supplementary  "  costs.  The  writers  applied 
these  terms  to  the  costs  that  did  not  vary  with  variations  in 
the  business  ;  such  costs  could  not  be  attributed  to  the  presence 
of  any  given  item  or  unit  of  the  business,  but  were  incurred 
for  the  sake  of  the  business  as  a  whole. 

The  hotel  manager  found  that  there  were  other  items  of 
cost  which  were  not  absolutely  constant,  but  did  not  change 
as  greatly  as  the  volume  of  the  business.  For  example,  the 
amount  of  gas  used  in  heating  his  ovens  and  in  other  cooking 
showed  some  falling  off  when  he  did  not  have  many  guests, 
but  it  was  a  relatively  small  falling  off,  for  the  ovens  had  to  be 
maintained  at  a  certain  heat  no  matter  whether  much  or  little 
food  was  prepared  in  them ;  and  much  the  same  considerations 
applied  to  other  kinds  of  cooking.    ' 

Somewhat  the  same  situation  existed  with  respect  to  his 
laundry  costs,  since  the  hotel  maintained  its  own  laundry  and 
did  not  have  the  work  done  at  piece  rates.  Then,  too,  the  num- 
ber and  total  wages  of  porters,  bell  boys,  maids,  doormen, 
waiters,  and  other  employees  remained  somewhat  constant, 
although,  of  course,  he  brought  in  some  additional  help  in  rush 
seasons.  In  general  terms,  he  came  to  the  conclusion  that 
most  of  these  costs  would  also  have  to  be  regarded,  for  the  pur- 
poses of  a  general  inquiry,  as  supplementary  or  indirect  or  over- 
head or  constant  costs. 

There  were  some  costs,  however,  that  varied  very  closely 
with  the  volume  of  business.  His  butcher's  bill  was  one  of 
these.  In  general,  it  was  ten  times  as  large  when  his  guests 
increased  tenfold.  What  was  true  of  the  meat  bill  was  true  of 
most  other  items  of  food.  As  he  read  on  the  subject  he  found 
that  accountants  called  such  costs  as  these  "  prime  "  or  "  direct " 


MACHINE    INDUSTRY   AND   INDIRECT   COSTS     233 

or  "  variable  "  costs,  meaning  of  course  that  they  are  costs 
which  vary  somewhat  directly  with  the  amount  of  business 
done.  Such  costs,  he  saw,  can  be  specifically  assigned  to  a 
given  unit  of  business.  If  that  unit  of  business  is  not  present, 
the  costs  are  not  present.  As  the  number  of  units  increases, 
these  costs  increase  at  about  the  same  rate. 

The  elements  of  cost  in  a  factory.  —  From  this  story  of  costs 
in  the  hotel  business  it  is  apparent  that  total  costs  in  any  busi- 
ness are  made  up  of  two  items,  the  pi-ime  or  direct  or  variable 
costs,  and  the  supplementary  or  indirect  or  ovei'head  or  con- 
stant costs.  It  is,  of  course,  not  always  easy  to  classify  every 
expense  of  the  business  under  one  or  the  other  of  these  heads. 
It  may  be  necessary  to  split  the  expense  up  into  its  elements 
and  then  classify  these. 

One  writer  ^  on  cost  accounting  states  the  matter  somewhat 
as  follows : 


"The  production  cost  is  made  up  of  direct  costs  plus  the  mdirect 
costs.  In  addition  to  this  production  cost  there  is  expense  connected 
with  selling  and  general  administration  which  is,  of  course,  one  kind  of 
overhead  costs.  The  production  cost  plus  the  selling  and  general 
administrative  cost  gives  the  total  cost  of  making  the  goods.  The 
difference  between  this  total  cost  and  the  selling  price  is  the  profit." 

The  same  writer  gives  a  list  of  items  which  occur  most  fre- 
quently in  indirect  costs  connected  with  production.  The 
items,  of  course,  vary  from  factory  to  factory,  but  the  following 
list  is  a  helpful  one : 


Indirect  material 

Oil 

Supplies 

Fjeight  and  express  in- 
ward, when  not  charged 
to  direct  material  cost 

Indirect  labor 

Supervision 


Inspection 

Experimental 

Rent 

Taxes 

Insurance 

Interest 

Depreciation 

Maintenance 


Repairs 

Power  or  power  plant 

Light 

Heat 

Small  tools 

Wastes  of  material, 
shrinkage  of  weight, 
defective  work 


1  J.  L.  Nicholson,  Cost  Accounting. 


234 


OUR  ECONOMIC   ORGANIZATION 


Prime  or  direct  cost  $400  ->- 


Selling  price  $77.5 

Total  cost  $675 

Total  production  cost  $625 


Direct 
Materials 


$200 


Production  Indirect  or  Overhead 


Direct 
Labor 


$200 


Depart- 
ment 
Expense 

$100 


Factory 
Expense 


$75 


General 
Expense 


Selling 
Expense 
Overhead 


$50 


Profit 


$100 


A  Cost  Diagram 


The  above  diagram  illustrates  by  purety  arbitrary  figures 
the  elements  which  make  up  cost.  The  illustration  is  applicable 
to  a  case  where  a  large  plant  is  divided  into  several  factories 
and  the  factories  into  departments.  It  assumes  that  a  system 
of  cost  accounting  has  been  installed  which  makes  it  possible 
to  tell  just  what  were  the  indirect  costs  of  specific  pieces  of  work. 
Since  we  do  not  know  the  details  of  the  cost  accounting  system 
which  has  been  installed,  we  shall  not  be  able  to  assign  or 
apportion  all  of  the  elements  of  indirect  cost  mentioned  in  the 
preceding  paragraph.  We  shall  assign  merely  certain  ones  as 
examples.  Let  us  follow  the  diagram  through  as  if  we  were 
following  the  manufacture  and  sale  of  a  machine  whose  selling 
price  is  $775.  To  begin  with,  at  the  lower  left  of  the  diagram,  the 
wood,  iron,  and  other  materials  used  "  directly  "  in  the  making 
of  a  specific  machine  cost  $200;  the  wages  of  men  working 
on  this  machine  amount  to  another  $200;  this  machine's 
fair  share  of  the  overhead  cost  of  the  department  in  which  it 
is  made,  including  among  other  things  its  share  of  the  salary 
paid  the  department  superintendent,  and  of  the  depreciation 
charge  on  equipment  in  that  department,  is  $100 ;  its  fair  share  of 
the  indirect  cost  of  the  entire  factory,  such  as  its  share  of  the 
salary  of  the  factory  superintendent,  is  $75  ;  its  fair  share  of  the 
indirect  cost  connected  with  the  entire  plant,  including  among 
other  things  its  share  of  the  salary  of  the  general  manager,  and 
of  the  expenses  of  the  central   administrative  ofl&ce,  is 


MACHINE   INDUSTRY   AND    INDIRECT   COSTS     235 

its  fair  contribution  to  the  maintenance  of  the  sales  organiza- 
tion is  $50;  thus  making  the  total  cost  S675.  Of  this,  $400 
represents  direct  costs  (costs  specifically  incurred  on  that  one 
item  of  business) ;  and  $275  represents  indirect  costs  (costs  in- 
curred for  the  business  as  a  whole,  and  assignable  to  specific 
units  only  by  a  process  of  "  allocation  ").  Since  they  are  able 
to  sell  the  machines  for  $775,  there  is  a  profit  of  $100. 

Indirect  costs  change  little  when  changes  occur  in  the  volume 
of  business.  —  It  is  not  hard  to  see  that  there  is  a  very  large 
element  of  indirect  costs  in  every  business  where  machines  are 
largely  used.  Now  let  us  note  that  these  indirect  costs  do  not 
change  greatly  —  they  remain  comparatively  constant  —  (you 
will  remember  they  are  sometimes  called  constant  costs)  when 
changes  occur  in  the  volume  of  business.  A  good  illustration 
of  this  may  be  found  in  the  railroad  industry.  Omitting  from 
consideration  dividend  payments,  railroad  expenditures  may 
be  classified  as  follows  : 

(1)  Fixed  charges 25% 

(2)  Total  operating  expenses 75% 

A.  General  operating  expenses 3% 

B.  Maintenance  of  way  and  structures     .     .     .16% 

C.  Maintenance  of  equipment 14% 

D.  Conducting  transportation 42% 

(3)  Total 100% 

Possible  Distribution  of  Railroad  ExPEfiDiTUREa  (Excluding 
Dividends) 

The  item  fixed  charges  includes  such  things  as  taxes,  and 
interest  on  money  which  has  been  borrowed.  Clearly  these 
amounts  do  not  change  over  short  periods  of  time,  no  matter 
whether  the  traffic  be  large  or  small.  General  operating  expenses 
include  such  matters  as  salary  of  the  president  and  cost  of  the 
central  administrative  office.  These  expenses  also  are  prac- 
tically independent  of  the  volume  of  the  traffic.  The  expendi- 
tures for  maintenance  of  way  and  structures  cover  such  items  as 
renewing    rails   and    ties;    repairing   and    replacing   roadbeds, 


236  OUR  ECONOMIC   ORGANIZATION 

bridges,  and  culverts ;  repairing  docks,  wharves,  station  houses, 
signs,  cattle  guards,  and  fences.  Many  of  these  expenses  are 
due  not  to  wear  and  tear  of  traffic  over  the  road,  but  to  rusting, 
rotting,  washing  out,  and  other  acts  of  nature.  Accordingly, 
even  in  maintenance  of  way  and  structures  quite  a  few  costs 
are  independent  of  the  volume  of  the  traffic.  This  is  true  also 
of  maintenance  of  equipment,  which  involves  repairing  and  re- 
newing the  locomotives  and  cars.  Even  equipment  wears  out 
almost  as  quickly  with  light  loads  as  it  docs  with  heavy  loads 
and  we  must  not  forget  that  much  equipment  has  to  be  thrown 
away  because  it  gets  out  of  date.  This  is  what  people  mean 
when  they  say  that  in  modern  machine  industry  there  is  much 
depreciation  due  to  obsolescence.  New  machines  come  in  so 
rapidly  these  days  that  quite  frequently  old  ones  are  thrown 
away  before  they  have  had  much  use.  The  money  paid  out  for 
conducting  transportation  takes  care  of  the  cost  of  fuel  and  water, 
train  supplies,  wages  of  switchmen,  conductors,  engineers,  signal 
men,  etc.  Even  these  items  are  more  independent  of  the  volume 
of  the  traffic  than  one  would  at  first  suppose.  Almost  as  many 
switchmen,  signal  men,  engineers,  and  conductors  are  used  with 
short  trains  as  with  long  ones.  However,  the  cost  of  conduct- 
ing transportation  is  more  closely  related  to  the  volume  of  the 
traffic  than  is  true  of  any  of  the  other  items. 

The  accompanying  table  will  serve  as  a  sort  of  definite  sum- 
mary of  this  discussion.  The  figures  of  column  III,  showing 
the  percentage  of  total  expenses  chargeable  to  each  class  of 
expenditures,  are  divided  in  such  a  way  as  to  indicate  how  much 
in  each  instance  must  be  paid  out  regardless  of  the  volume  of 
the  traffic  (column  I),  and  how  much  bears  a  relation  to  the 
volume  of  traffic  (column  II).  You  will  notice  that  in  the 
railroad  business  nearly  60  per  cent  of  the  total  cost,  exclusive 
of  dividend  payments,  has  little  relation  to  the  volume  of 
business.  This  is  a  higher  percentage  than  is  true  of  most 
other  industries,  but  after  all,  the  railroad  gives  us  merely 
an  extreme  illustration  of  what  exists  in  all  technological 
industry. 


MACHINE   INDUSTRY   AND   INDIRECT   COSTS     237 


I 

II 

III 

Classes  of  Expenditure' 

%  of  costs  in- 
dependent of 

volume  of 
traffic 

(constant) 

%  of  costs  de- 
pendent on 
volume  of 

traffic 
(variable) 

Total 

Fixed  charges 

25 

0 

25 

General  operating  expenses  .     . 
Maintenance  of  way  and  struc- 
tures       

Maintenance  of  equipment  .     . 
Conducting  transportation   .     . 

3 

10 

7 
14 

0 

6 

7 
28 

3 

16 
14 
42 

Total  operating  expenses   . 

34 

41 

75 

Total 

59 

41 

100 

Analysis  of  Relationship  between  Constant  and  Variable  Costs 
IN  Railroading 


The  presence  of  indirect  costs  stimulates  efforts  to  enlarge 
the  business.  —  Indirect  cost,  then,  goes  on  much  the  same 
whether  a  business  shrinks  or  grows.  If  it  shrinks,  this  element 
of  cost  will  not  shrink  anything  like  as  much.  If  it  grows,  this 
element  will  not  grow  anything  like  as  much.  This  fact  makes 
a  modern  business  manager  eager  to  increase  the  volume  of  his 
business  so  that  his  indirect  (constant)  costs  may  be  spread  over 
as  many  units  of  business  as  possible.  This  is  especially  true 
when  his  plant  is  not  running  to  its  full  capacity. 

The  experience  of  a  certain  manufacturer  of  hats  shows  why 
this  is  true.  This  man  found  that  the  total  of  his  indirect  costs 
for  a  year  amounted  to  $10,000.  He  found,  further,  that  the 
direct  costs  entering  into  each  hat,  including  both  direct  labor 
and  direct  material,  were  50  cents.  If  he  should  manufacture 
and  sell  only  1000  hats  in  the  course  of  a  year,  his  direct  costs 
on  the  1000  would  be  $500;  his  indirect  costs  $10,000  — 
a  total  of  $10,500.  Clearly  enough,  a  price  of  $10.50  for  each 
hat  would  just  enable  him  to  get  back  his  cost.     If,  however,  he 

'  Cf.  Noyes,  American  Railroad  Rales,  p.  17. 


238  OUR  ECONOMIC   ORGANIZATION 

could  make  and  market  in  a  year's  time  10,000  hats,  his  total 
costs  would  be  $15,000  and  a  price  of  only  $1,50  a  hat  would 
enable  him  to  meet  his  costs.  He  concluded  that  he  ought  to 
produce  many  hats  and  offer  them  for  sale  at  a  fairly  low  figure. 
At  what  figure?  The  exact  answer  to  this  question  would 
involve  many  business  considerations  which  cannot  be  taken 
up  in  this  lesson.  The  lower  the  price  the  more  hats  people 
would  buy ;  but  it  should  be  clear  that  he  could  not  afford  to 
put  the  price  below  50  cents,  for  the  straw  cost  and  the  labor 
cost  specifically  incurred  for  each  hat  were  50  cents,  and  such 
a  price  would  leave  him  nothing  which  he  could  apply  toward 
meeting  his  overhead  costs.  The  price  should  be  something 
over  50  cents,  and  it  should  be  a  figure  that  would  bring  into 
existence  a  large  volume  of  business,  so  that  the  constant  costs 
would  be  spread  over  many  units. 

This  tendency  to  increase  the  size  of  the  business  when  in- 
direct costs  are  largely  present,  explains  many  of  the  happenings 
in  modern  business.  For  one  thing,  it  shows  why  American 
manufacturers  sometimes  sell  goods  abroad  at  a  lower  price 
than  they  sell  them  at  home.  Mr.  Edison  once  said  of  this 
practice,  "  I  was  the  first  manufacturer  in  the  United  States  to 
adopt  the  idea  of  dumping  surplus  goods  upon  the  foreign 
market.  Thirty  years  ago  my  balance  sheet  showed  me  that 
I  was  not  making  much  money.  My  manufacturing  plant  was 
not  running  to  its  full  capacity,  because  I  couldn't  find  a  market 
for  my  products.  Then  I  suggested  that  we  undertake  to  run 
our  plant  on  a  full  capacity  and  sell  the  surplus  products  in 
foreign  markets  at  a  price  somewhat  higher  than  the  direct 
cost  of  making  them,  but  somewhat  lower  than  the  total  cost 
(direct  plus  indirect)  if  that  should  be  necessary.  Every  one  of 
my  associates  opposed  me.  I  had  my  experts  figure  out  how 
much  it  would  add  to  the  cost  of  operating  the  plant  if  we  in- 
creased our  production  25  per  cent.  On  this  basis  I  sent  a  man 
to  Europe  who  sold  lamps  there  at  a  price  less  than  the  cost  of 
production  in  Europe.  American  consumers  were  not  injured 
in  the  slightest,  for  they  paid  the  same  price  they  had  always 


MACHINE    INDUSTRY   AND   INDIRECT   COSTS     239 

paid,  and  I  was  enabled  to  employ  25  per  cent  more  men  and 
get  rid  of  my  surplus  product  by  dumping  it  upon  the  foreign 
market." 

The  principle  followed  by  Mr.  Edison  in  this  matter  is  pre- 
cisely the  same  as  that  of  an  electric  light  and  power  company 
v;hich  sells  electricity  for  lighting  purposes  at  one  price  and  elec- 
tricity for  power  at  a  much  lower  price.  If  it  sold  electricity  for 
lighting  alone,  the  plant  would  be  practically  unused  the  greater 
part  of  each  day.  By  cutting  the  price  on  electricity  for  power, 
people  are  persuaded  to  use  electric  power  instead  of  steam 
power.  The  price  set  for  this  electric  power  should  be  some- 
what higher  than  direct  costs.  The  enlarged  business  enables 
the  company  to  spread  its  indirect  costs  over  a  great  number  of 
units  of  business  with  a  resulting  increase  in  profits. 

This  shows  also  why  many  businesses  find  it  profitable  to  set 
up  departments  to  utilize  the  by-products  of  the  original  busi- 
ness. The  new  department  can  often  be  added  without  a 
proportional  increase  of  indirect  costs,  and  the  increased*Volume 
of  business  under  such  circumstances  is  likely  to  spell  increased 
profits.  So,  too,  a  railroad  may  wisely  build  a  branch  line, 
that  considered  by  itself,  does  not  seem  profitable.  If,  however, 
it  adds  to  the  traffic  hauled  over  the  main  line,  so  that  the  in- 
direct costs  of  the  main  line  are  spread  over  more  business,  it 
may  be  worth  doing.  So,  too,  if  empty  cars  move  prevailingly 
in  one  direction  on  a  certain  railroad,  it  wiU  pay  to  make  very 
low  rates  to  induce  traffic  to  move  in  that  direction,  and  it 
pays  to  make  low  rates  on  heavy,  bulky  commodities  for  just 
the  same  reason  that  it  pays  to  make  low  rates  on  electricity 
for  power.  It  is  not  necessary  to  heap  up  examples,  however. 
Indirect  costs  are  so  prevalent  in  modern  industry  that  ex- 
amples are  numerous  in  almost  every  business. 

It  is  evident  enough  that  the  presence  of  indirect  costs  is  one 
of  the  reasons  why  many  businesses  have  a  tendency  to  grow 
larger  and  larger.  This  is  such  a  general  tendency  that  we 
say  we  are  living  in  a  period  of  large-scale  production.  The 
discussion  of  the  advantages  and  disadvantages  of  large-scale 


240 


OUR  ECONOMIC   ORGANIZATION 


production  and  of  the  size  which  gives  maximum  efficiency  in  a 
business  is  taken  up  in  a  later  lesson,  but  one  of  the  causes  of 
large-scale  production  we  see  now.     (See  Stud}^  XV.) 

Indirect  costs  make  it  necessary  to  watch  business  opera- 
tions closely.  —  There  is  an  interesting  corollary  of  the  fact 
that  the  presence  of  indirect  costs  stimulates  efforts  to  enlarge 
the  business.  Their  presence  makes  for  an  increased  sensitive- 
ness. A  ver}^  slight  change  in  the  volume  of  business  or  a  very 
slight  shift  in  prices  may  make  all  the  difference  between  huge 
profits  and  bankruptcj^  An  arbitrary  arithmetical  illustration 
shows  how  this  can  be.  Suppose  that  we  represent  the  gross 
income  of  a  business  by  100,  its  direct  costs  by  40,  and  its  in- 
direct costs  by  55.  The  profits  are,  of  course,  5.  If  now  the 
indirect  costs  do  not  change  at  all  (as  might  well  happen), 
an  increase  of  10  per  cent  in  the  volume  of  the  business  would 
increase  only  the  direct  costs  by  10  per  cent,  and  as  the  table 
shows,  profits  would  increase  from  5  to  11,  which  is  an  increase 
of  120  per  cent.  On  the  other  hand,  if  business  should  fall  off 
10  per  cent,  the  concern  would  be  headed  toward  bankruptcy. 
It  is  no  wonder  that  business  men  are  exceedingly  careful  to 
retain  business  they  have  once  secured ;  are  willing  to  do 
business  on  very  "  narrow  margins  "  if  they  can  get  a  large 
volume  of  it ;  are  keen  to  secure  the  services  of  a  manager 
who  will  add  "  just  a  little  "  to  their  trade. 


Gross  income 
Direct  costs 
Indirect  costs 
Profits      .     . 


Conditions 
Assumed 


100 

40 

55 

5 


When  Business 
Increases  10  % 


110 
44 
55 
11 


When  Business 
Decreases  10  % 


:90 

36 

55 

-1 


Possible  Results  of  Slight  Shifts  in  Volume  of  Business 


The  worst  of  it  is  that  one  can  seldom  predict  just  what  will 
happen.     Let  us  take  up  the  hat  case  again.     Suppose  that  in 


MACHINE   INDUSTRY   AND   INDIRECT   COSTS     241 

a  given  year  the  hat  manufacturer  was  making  and  selHng  at 
$11  each,  1000  hats.  This  would  give  him  a  profit  of  $500  for 
the  year.  Suppose  that  the  manufacturer  told  this  foreman 
that  he  intended  to  cut  the  price  of  hats  to  $5.  His  foreman 
might  well  be  pardoned  for  believing  that  this  would  lead  to 
bankruptcy.  Yet  if  the  lower  price  should  result  in  a  sale  of 
3000  hats,  his  profit  for  the  year's  work  would  be  $3500.  Of 
course,  it  could  not  be  known  in  advance  what  result  in  sales 
would  be  brought  about  by  the  reduced  price. 

People  have  in  mind  this  difficulty  in  ascertaining  facts  when 
they  say  that  our  industry  to-day  is  speculative.  It  is  not  easy 
to  know  what  facts  will  develop.  Chances  must  be  taken. 
Such  a  situation  is,  of  course,  not  pleasing  to  business  managers, 
and  they  try  in  many  ways  to  obtain  knowledge  as  definite  as 
possible.  The  way  most  closely  connected  with  indirect  costs 
is  by  the  interesting  device  known  as  "  cost  accounting."  This 
is  a  recent  device.  Its  essential  feature  is  that  by  careful 
analysis  one  assigns  to  each  unit  of  the  product  the  direct  costs 
involved,  and  on  some  appropriate  basis  apportions  or  allocates 
the  indirect  costs.  The  business  man  finds  that  he  can  use 
information  of  this  sort  not  merely  to  tell  him  what  his  costs 
have  been,  but  also  to  point  out  how  he  can  operate  his  business 
more  economically.  He  can  learn  fairly  definitely  what  parts 
of  his  business  are  run  at  a  loss,  what  parts  are  profitable 
but  cost  too  much,  and  what  parts  would  be  more  profitable 
if  they  could  be  expanded.  The  importance  of  this  "  in- 
strument of  control  in  the  hands  of  the  business  executive  " 
is  particularly  great  because  indirect  costs  tend  to  bring  about 
business  operations  of  such  a  magnitude  that  personal  super- 
vision and  control  will  not  suffice. 

Since  a  slight  change  in  the  volume  of  business  may  spell 
bankruptcy,  we  find  our  managers  to-day  very  anxious  to  secure 
and  retain  a  firm  hold  on  their  customers.  Increasingly  they 
are  unwilling  to  rely  upon  the  ''  orthodox  "  system  of  distribu- 
tion ;  that  is  to  dispose  of  their  goods  through  the  wholesaler 
and  the  retailer  to  the  consumer.     Increasingly  they  try  to 


242  OUR  ECONOMIC   ORGANIZATION 

make  direct  connections  with  the  consumer.  Sometimes  they 
do  this  by  estabhshing  chains  of  branch  stores ;  sometimes  by 
setting  up  a  mail  order  business;  sometimes  by  conducting 
such  a  broad  campaign  of  advertising  that  it  is  called  national 
advertising,  so  that  the  consumer  will  be  led  always  to  ask 
for  their  products.  This  helps  explain  why  so  many  exten- 
sive experiments  are  being  carried  on  to-day  in  marketing 
goods  and  why  advertising  has  only  within  the  past  generation 
come  to  play  an  important  part  in  our  economic  life,  although  we 
have  had  advertising  even  in  newspapers  for  several  centuries. 
In  the  days  of  simple  industry,  when  direct  costs  constituted 
nearly  the  total  cost,  and  business  was  not  so  sensitive,  and  there 
was  not  such  a  tremendous  pressure  to  enlarge  the  business 
unit,  advertising  had  no  such  field  as  it  has  to-day. 

Cutthroat  competition.  —  Indirect  costs  also  give  us  a  par- 
tial explanation  of  that  curious  phenomenon  called  cutthroat 
competition.  Cutthroat  competition  means  simply  that  busi- 
ness managers  in  their  struggle  for  added  business  or  to 
retain  their  existing  volume  of  business,  cut  prices  lower  and 
lower  until  they  are  sometimes  selling  their  goods  even  below 
prime  cost.  Such  a  policy  must,  of  course,  result  in  business 
failure  if  long  continued,  and  in  many  cases  it  would  not  have 
been  adopted  if  the  business  managers  concerned  could  have 
known  all  the  facts  in  the  case.  Unless,  however,  they  had 
remarkably  good  cost  accounting  systems  they  would  not  know 
what  their  prime  cost  was.  In  such  a  case  cutthroat  competi- 
tion is  primarily  the  result  of  ignorance. 

There  are  cases,  however,  when  a  manager  would  feel  justified 
in  cutting  his  selling  price  even  below  direct  cost.  He  might 
do  so  as  a  temporary  measure,  hoping  that  by  a  short  war  he 
might  drive  his  competitors  out  of  the  field ;  or  he  might  do 
it  in  one  line  of  business  in  order  to  develop  some  other  very 
profitable  line,  as  the  Pennsylvania  Railroad  is  said  to  have 
done  with  its  coal  traffic  in  order  to  stimulate  manufacturing 
along  its  line  and  thus  secure  the  profitable  traffic  in  manu- 
factured goods. 


MACHINE    INDUSTRY   AND   INDIRECT   COSTS     243 

Cutthroat  competition  is  at  its  worst  when  it  occurs  in  a 
business  which  uses  highly  speciaHzed  capital  which  cannot 
be  readily  transferred  to  some  other  occupation.  The  railroad 
industry  is  a  good  illustration.  Tracks,  locomotives,  cars,  etc., 
require  tremendous  outlay  of  money,  and  when  these  instruments 
have  been  called  into  being  they  can  be  used  only  for  the  one 
purpose.  Capital  has  been  committed  to  the  enterprise  in  a 
way  that  is  irrevocable.  If  a  cut-rate  fight  starts  in  such  an 
industry  it  may  go  to  almost  any  lengths.  Its  managers  are 
not  likely  to  know  their  direct  costs  and  so  they  take  chances 
by  cutting  prices  lower  and  lower.  Even  if  they  do  know 
them,  they  may  decide  to  fight  it  out ;  and  they  fight  it  out  in 
a  field  which  no  one  feels  he  can  abandon  because  of  the  great 
loss  involved  in  a  transfer.  In  the  1870's  and  80's  when  we 
were  developing  our  great  Middle  West,  the  railroads  of  the 
country  competed  very  strenuously.  They  offered  discrimi- 
nating rates  and  discriminating  services.  They  even  paid  back 
money  to  certain  shippers  if  they  could  not  induce  them  to  send 
freight  over  their  lines  in  any  other  way.  This  was  called 
"  rebating."     Such  practices  led  to  evils. 

The  railroad  is  one  of  om-  basic  industries.  It  is  used  by 
almost  every  one.  Unfair,  secret  practices  in  such  an  industry 
were  a  great  hardship  to  the  shippers  who  were  discriminated 
against.  The  advantages  that  the  favored  shippers  reaped 
helped  some  of  them  to  get  monopoly  control  in  their  industries. 
From  this  it  may  be  seen  that  the  presence  of  indirect  costs  in 
industry  had  greatly  increased  the  problems  of  social  control, 
for  the  control  of  public  service  companies,  such  as  the  rail- 
roads, and  the  control  of  monopolies  or  trusts  are  among  the 
most  serious  problems  of  the  day.     (See  Study  XVII.) 

Indirect  costs  and  social  control.  —  We  can  begin  to  see  why 
society  faces  no  small  task  in  the  social  control  of  modern  large- 
scale  business.  Especially  is  the  problem  serious  with  reference 
to  the  public  utilities  and  trusts.  Consider  the  vast  stores  of 
detailed  information  which  would  have  to  be  made  available 
before  one  could  know  their  costs  intimately  enough  to  separate 


244 


OUR  ECONOMIC   ORGANIZATION 


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MACHINE    INDUSTRY  AND   INDIRECT   COSTS     245 

them  accurately  into  direct  and  indirect  costs.  Cost  accounts 
that  are  helpful  are  not  so  easy  to  organize  and  use  as  they  have 
appeared  in  the  simple  illustrations  used  in  this  lesson.  Con- 
sider, too,  the  judgment  a  regulating  officer  would  have  to 
exercise  in  fixing  prices,  for  example,  when  the  smallest  of 
margins  of  profit  might  make  all  the  difference  between  exorbi- 
tant profits  and  bankruptcy.  Consider,  also,  the  difficulty  in 
determining  what  constitutes  fair  profits.  They  ought  to  be 
high  enough  to  tempt  a  satisfactory  number  of  people  and 
a  sufficient  amount  of  capital  to  operate  in  a  given  business. 
But  who  could  determine  in  advance  what  would  be  "  satis- 
factory," and  even  if  that  were  known,  who  could  determine 
what  rate  of  profits  would  bring  about  this  "  satisfactory  " 
condition?  "  Can  we  control  the  genie  that  has  come  out  of  the 
vessel  we  have  opened?  " 

Simple  industry  versus  complex  industry.  —  We  have  reached 
a  stage  in  our  study  where  it  is  worth  one's  while  once  more  to 
make  a  comparison  of  the  industry  of  medieval  England  with 
that  of  to-day. 

The  outstanding  features  of  industry  of  the  fourteenth  and 
fifteenth  centuries  were  these  :  it  was  small-scale  industry ;  both 
worker  and  master,  even  those  of  limited  intelligence,  could 
survey  and  understand  the  processes  involved.  Markets  were 
of  small  scale  with  respect  both  to  space  area  and  to  time  area, 
and  simple  commercial  organization  would  suffice.  It  was  tool 
industry,  so  that  the  technique  involved  was  simple  and  under- 
standable. The  social  structure  seems,  as  we  look  back,  rela- 
tively simple.  Industrial  control  was  primarily  local,  and 
society  lacked  its  modern  interdependence.  A  man  of  but 
ordinary  intelligence  and  training  could  appreciate  with  some 
accuracy  his  relationship  to  the  rest  of  organized  society.  It 
was  industry  where  the  total  costs  were  almost  entirely  direct 
costs,  so  that  the  master  could  know,  and  would  know  without 
the  necessity  of  a  complex  accounting  system,  his  costs  of 
operation.  It  was  industry  where  the  initial  capital  outlay 
involved  was  exceedingly  small. 


24G  OUR   ECONOMIC   ORGANIZATION 

Very  different  things  are  true  of  our  modern  industry.  It  is 
large-scale  industry  so  that  practically  no  one  in  a  great  organ- 
ization can  know  the  details  of  the  processes  involved.  The 
market  area,  both  time  and  space,  is  tremendous  and  the  com- 
mercial organization  of  society  correspondingly  intricate,  com- 
plex, and  difficult  to  understand.  It  is  machine  industry,  as 
opposed  to  tool  industry,  with  all  that  this  involves  in  intricacy 
of  processes,  in  difficulty  of  the  determination  of  costs,  and  in 
the  complexities  of  social  control.  It  is  a  complex,  inter- 
dependent society,  so  that  even  the  most  intelligent  manager 
has  difficulty  in  fully  appreciating  his  relationship  to  the  rest 
of  society.  It  is  an  industry  where  a  large  part  of  the  total 
cost  is  made  up  of  supplementary  cost,  so  that  pressure  is  brought 
upon  the  manager  to  retain  his  present  volume  of  business  and 
to  develop  new  business  under  conditions  where  competition 
can  readily  become  tremendously  severe ;  and  finally,  it  is  in- 
dustry where  large  initial  capital  outlay  is  required.  Truly  the 
world  has  changed. 

PROBLEMS 

1 .  Draw  up  a  definition  of  direct  cost  and  give  six  illustrations  of  it. 

2.  Draw  up  a  definition  of  indirect  cost  and  give  six  illustrations 
of  it. 

3.  What  kind  of  cost,  direct  or  indirect,  forms  the  larger  part  of 
total  costs  in  the  following  businesses;  making  sun-dried  bricks  by 
hand,  cobbling  shoes,  making  shoes  in  a  factory,  unloading  coal  by  a 
steam  shovel? 

4.  Would  it  be  good  business  policy  for  a  manager  of  a  hotel 
secretly  to  offer  lower  rates  to  some  possible  guests  if  otherwise  they 
would  not  stop  with  him?  Might  it  make  a  difference  if  he  were  con- 
sidering a  "short  run  policy"  or  a  "long  time  policy"? 

5.  If  a  railroad  between  New  York  and  Chicago  is  already  in 
existence  and  trains  containing  some  empty  cars  are  running,  what 
extra  cost  would  the  railroad  incur  if  it  hauled  a  five-pound  box  from 
Chicago  to  New  York  ? 

6.  Would  it  be  good  business  policy  for  the  road  to  haul  such  a 
box  at  a  rat(i  only  a  little  in  excess  of  this  added  cost,  if  it  could  get  no 


MACHINE    INDUSTRY  AND   INDIRECT   COSTS     247 

more  for  the  service?    Would  it  be  good  policy  to  haul  all  traffic  at 
such  rates  ? 

7.  A  salesman  soliciting  advertising  for  his  magazine  recently 
said  to  a  shoe  manufacturer,  "You  are  at  present  seUing  100,000  pairs 
of  shoes  a  year.  If  you  do  the  advertising  I  suggest  you  can  sell 
200,000  pairs  and  thus  double  your  profits."  Wherein  would  you  criti- 
cize the  argument  of  tliis  salesman?  Of  what  was  his  knowledge 
weak? 

8.  The  efficiency  of  modern  railroad  transportation  is  shown  by 
the  example  of  a  certain  American  railroad  which  is  said  to  haul  freight 
at  an  average  cost  of  one  mill  per  ton-mile.  Should  you  regard  it  as 
worth  your  while  to  carry  a  ton  of  goods  a  mile  for  a  tenth  of  a  cent  ? 
How  is  the  railroad  able  to  do  it  ? 

9.  Give  three  examples  of  depreciation  through  obsolescence; 
three  of  depreciation  due  to  wear  and  tear. 

10.  Show  why  the  profit  of  the  hat  manufacturer  mentioned  in  the 
text  would  be  $3500  on  a  sale  of  3000  hats  at  $5  each.  If  he  manu- 
factured only  one  hat,  at  what  price  would  it  be  necessary  to  sell  it  to 
make  the  same  profit  ? 

11.  Suppose  that  the  manufacturer  made  7000  hats.  At  what  price 
would  he  have  to  sell  each  hat  to  get  back  his  total  cost?  At  what 
price  if  he  sold  25,000  hats? 

12.  A  few  years  ago  an  automobile  manufacturer  offered  to  return 
$50  to  every  purchaser  of  one  of  his  cars  during  the  year,  if  a  total  of 
300,000  cars  were  sold  before  August  1.  Some  persons  said  of  him, 
"How  generous."  Others  said,  "He  is  childish."  How  do  you  ac- 
count for  his  action  ? 

13.  The  larger  the  overhead  or  indirect  cost  of  a  business  the  more 
important  it  becomes  to  increase  the  volume  of  sales.     Explain  why. 

14.  An  American  manufacturer  of  a  certain  commodity  could  sell  it 
in  England  if  he  quoted  a  price  of  $18  a  ton  in  England.  Market  con- 
ditions in  the  United  States  were  such  as  to  enable  him  to  secure  $24. 
American  buyers  complained  when  he  sold  his  commodity  abroad 
cheaper  than  at  home.  He  replied  that  his  action  benefited  the 
American  consumer.     How  could  he  argue  this? 

15.  An  American  manufacturer  recently  said,  "Before  I  installed 
expensive  machinery  I  could  make  a  good  profit  scUing  at  home.     Since 


248  OUR   ECONOMIC   ORGANIZATION 

I  have  installed  this  maciiinery  I  must  seek  foreign  markets."     Was 
there  any  sense  in  his  statement  ? 

16.  "In  industries  where  the  indirect  cost  is  a  large  proportion  of 
the  total  cost  it  pays  to  take  business  at  a  price  which  is  below  total 
cost,  provided  that  the  price  is  above  direct  cost."     Explain  why. 

17.  "As  indirect  costs  increase  business  ventures  become  more 
speculative,  more  risky."  Is  this  statement  true  ?  Can  you  name  any 
other  factors  which  have  tended  to  make  business  ventures  more 
speculative  ? 

18.  "The  increased  use  of  machinery  has  greatly  increased  indirect 
costs."     Explain. 

19.  "  The  use  of  machinery  in  production  has  stimulated  the  growth 
of  large  business  units."     Explain. 

20.  "In  the  days  when  direct  costs  were  the  major  part  of  total 
costs,  the  incentive  to  extend  a  given  business  was  not  great."  Ex- 
plain. 

21.  "Indirect  costs  have  caused  countless  experiments  to  be  made 
in  methods  of  marketing  goods."     Why? 

22.  "A  good  accountant  is  more  valuable  to  a  business  than  a  good 
lawyer;  accounting  is  more  useful  to  society  than  the  law."  What  do 
you  think  of  this  statement  ? 

23.  Name  as  many  as  you  can  of  the  difficulties  of  business  manage- 
ment that  arise  from  indirect  costs.  Name  as  many  as  you  can  of  the 
institutions,  mechanisms,  or  devices,  which  business  men  use  to  con- 
trol and  guide  the  difficult  situations  arising  from  indirect  costs. 

24.  Why  did  the  competition  of  railroads  so  often  force  them  into 
financial  difficulties?  How  could  it  be  possible  that  a  road  would  oc- 
casionally be  in  difficulty  a  long  time  before  finding  it  out  ? 

25.  "Cutthroat  competition  among  railroads  shows  that  the  ac- 
counting systems  of  the  road  were  inadequate."  Does  this  seem  prob- 
able to  you?  Do  you  see  any  reason  why  the  railroads  in  the  80's 
might  have  had  inadequate  accomiting  systems? 

26.  "Just  railroad  rates  can  be  based  only  on  a  knowledge  of  costs." 
Is  this  statement  true  ? 

27.  Some  years  ago  the  federal  government  passed  a  law  which 
forced  all  interstate  railroads  to  use  the  same  system  of  accounts. 
What  reasons  can  you  give  for  such  a  law  ? 


MACHINE   INDUSTRY  AND   INDIRECT   COSTS     249 

28.  Are  the  economic  problems  of  the  railroad  business  essentially 
different  from  the  problems  of  any  modern  industry  in  which  indirect 
costs  make  up  a  large  part  of  total  cost  ? 

29.  In  the  days  of  handicraft  industry  men  did  not  push  vigorously 
for  new  markets;  to-day,  when  machine  industry  is  used,  there  is 
tremendous  competition  for  new  fields  in  which  to  sell  goods.  How 
do  you  account  for  this  difference  ? 

30.  Draw  up  a  list  of  the  consequences  (a)  to  the  business  manager, 
(6)  to  society,  of  the  coming  in  of  indirect  costs. 

31.  When  we  speak  of  industry  in  1750  as  ha\'ing  been  "simple" 
and  of  industry  to-day  as  being  "  complex,"  what  do  we  mean  ?  What 
are  the  component  elements  of  this  simplicity  or  complexity? 

32.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  417-423,  Selections 
171-177. 

Taussig,  Principles  of  Economics,  Second  Re^^sed  Edition:  chs.  12-16. 


STUDY  XV 

THE  SIZE   OF  MAXIMUM  EFFICIENCY  OF  THE 
BUSINESS  UNIT 

PURPOSES  OF  THIS  STUDY: 

1.  To  understand  the  reasons  for  the  increasing  size  of  the  business 

unit. 

2.  To  get  some  understanding  of  the  fields  appropriate  to  large  and  to 

small  business  units. 

Since  the  coming  in  of  the  Industrial  Revolution  there  has 
been  a  phenomenal  growth  in  the  size  of  business  units.  This 
increase  has  been  due  to  many  causes  and  has  taken  various 
forms.  As  we  read  of  the  growth  of  large  business  units  in 
this  chapter  we  should  realize  that  we  are  not  necessarily  study- 
ing the  growth  of  monopolized  business,  generally  called  "  the 
trusts."  All  the  forms  of  large-scale  production  which  we 
shall  consider  may  be  in  existence  without  monopoly  being 
present.  It  is  true  that  sometimes  the  enlarged  business  has 
become  a  trust,  but  the  increasing  size  of  business  units  has  in 
the  main  resulted  from  the  manager's  striving  to  bring  his 
business  to  "  a  size  of  maximum  efficiency."  But  what  does 
this  mean?  As  we  have  seen  repeatedly,  modern  business  is 
conducted  on  the  "  gain  "  basis ;  managers  do  those  things 
which  "  pay."  Accordingly,  a  manager  who  is  trjdng  to  arrive 
at  a  size  of  maximum  efficiency  will  continually  be  considering 
such  questions  as  these : 

1 .  What  effect  will  increased  size  have  upon  my  costs  of  manu- 
facture? Our  study  of  indirect  costs  enables  us  to  know  some 
of  the  things  which  will  pass  through  the  manager's  mind  in 
this  connection. 

250 


MAXIMUM   EFFICIENCY   OP   THE   BUSINESS  UNIT     251 

2.  What  effect  will  increased  size  have  upon  my  marketing 
problems,  including  both  the  purchase  of  materials  and  the  sell- 
ing of  the  finished  product  and  transportation  costs  in  both 
connections  ? 

3.  What  effect  will  increased  size  have  upon  the  ease  or  diffi- 
culty of  bearing  the  risks  of  my  industry? 

4.  Will  the  efficiency  of  administration,  in  relationship  to  its 
costs,  be  increased  or  diminished  by  a  growth  in  size  ? 

The  chief  causes,  and  forms  of  growth  as  well,  should  become 
clear  if  we  look  at  the  development  of  one  or  two  great  industries 
with  which  every  one  is  familiar. 

Meat  packing  furnishes  a  good  illustration.  —  Sixty  years 
ago  the  fresh  meats  that  were  served  on  people's  tables  were 
for  the  most  part  produced  in  the  local  community.  The  local 
butcher  purchased  the  animal  from  the  farmer,  dressed  it 
himself,  and  sold  it  over  the  counter  of  his  little  shop,  or  peddled 
it  from  a  wagon  to  the  families  in  the  neighborhood.  Such  a 
method  of  dressing  and  vending  meat  was  not  very  different 
from  that  employed  by  butchers  of  medieval  times.  Clearly 
such  a  business  was  a  small-scale  business.  Not  a  great  amount 
of  meat  was  produced  by  any  individual. 

But  there  were  strong  geographic  reasons  in  America  why  the 
producing  of  beef,  pork,  and  mutton  near  the  place  where  they 
were  used  would  not  continue  indefinitely.  The  great  flat,  fer- 
tile prairies  of  the  central  Mississippi  Valley  and  the  extensive 
plains  farther  west  were  naturally  so  well  adapted  to  furnish- 
ing the  food  supply  of  live  stock  that  no  other  district  in  the 
United  States  could  long  compete  with  them,  if  only  adequate 
transportation  facilities  could  be  developed  for  carrying  meat 
products  to  other  districts. 

To  Chicago,  lying  in  the  center  of  this  rich  valley,  there  came 
in  the  sixties  and  seventies  the  men  whose  names  have  become 
most  widely  identified  with  meat  prodliction.  Some  of  these 
men  were  merel}^  local  butchers,  some  were  stock  l)uyers  who 
purchased  live  stock  from  the  raisers  and  shipped  it  to  the  eastern 
states  "  on  the  hoof  "  to  other  dealers  who  turned  it  into  dressed 


252  OUR   ECONOMIC   ORGANIZATION 

meat  and  sold  it  to  consumers.  Still  others  of  these  ''  meat 
men  "  were  packers  as  well  as  dealers.  The  packers  did  some 
slaughtering  —  especially  of  hogs  —  and  salted,  smoked,  or 
otherwise  preserved  the  product  before  shipping.  This  work 
was  the  original  pacldng  industry.  Compared  with  the  great 
meat  industries  in  Chicago  to-day,  these  enterprises  were  small 
and  simple.  Let  us  see  what  caused  the  present  large-scale 
production. 

Striking  results  of  refrigerator  car.  —  Shipping  stock  "on 
the  hoof  "  to  eastern  cities  was  a  risky  business  conducted  in  a 
wasteful  way.  The  stock  which  was  loaded  into  stock  cars  in 
Chicago  arrived  in  the  east  much  shrunken  in  weight.-^  ^Stock 
became  sick,  was  injured,  and  many  died  on  the  long  crowded 
journey  through  varying  weather  and  temperature.  At  certain 
points  on  the  route  the  stock  was  unloaded,  fed,  watered,  and 
rested,  and  of  course  this  was  expensive.  A  little  more  than 
half  of  an  animal  can  be  used  for  meat,  and,  in  those  days,  the 
balance,  with  the  exception  of  the  hide,  was  sheer  waste. 
Thus  to  the  other  wastes  of  the  system  had  to  be  added 
nearly  a  half  of  the  freight  cost.  Under  such  circumstances 
it  was  not  strange  that  the  Chicago  cattle  dealers  were  anxious 
to  find  a  method  by  which  fresh,  dressed  meat  could  be  shipped 
to  their  eastern  buyers.  Such  a  method  was  found  in  the  con- 
struction of  refrigerator  cars.  In  these  cars  chilled  meat  could 
be  sent  in  perfect  condition  to  the  most  distant  markets. 

But  building  the  first  of  these  cars  was  taking  a  considerable 
risk,  as  they  were  at  best  an  experiment.  The  railroads  were 
unwilling  to  take  this  risk,  and  they  believed,  also,  that  many 
of  their  live  stock  cars  would  be  rendered  useless  if  the  refriger- 
ator car  was  satisfactory.  As  a  result  of  these  and  other  cir- 
cumstances, the  packers  themselves  were  compelled  to  build 
refrigerator  cars.  Thus  the  business  of  the  stock  dealers  was 
expanded  into  a  new,  but  an  allied  industry,  that  of  transporta- 
tion. They  were  no  longer  merely  stock  dealers  and  butchers. 
They  became  owners  of  transportation  facilities.  This  phase 
of  the  packing  business  has  developc^l  unl  il  now,  at  least  twenty- 


MAXIMUM   EFFICIENCY   OF   THE   BUSINESS  UNIT     253 


five  thousand  refrigerator  cars  are  owned  and  used  by  the  Chi- 
cago packing  plants. 

The  adoption  of  the  refrigerator  car,  which  was  ahnost  forced 
upon  the  stock  dealers  by  the  wasteful  methods  of  shipping  live 
stock,  in  turn  contributed  to  forcing  them  into  slaughtering  on 
a  large  scale.  Upon  the  one  hand,  the  development  of  an  ex- 
panding, speculative  eastern  market  through  refrigerator  cars 
meant  that  they  had  to  develop  a  producing  or  slaughtering 


mmmm 


mtummm 


SWIFT 

REFRIGERATOR 

LINE 

12633 


D 


Kv 


Sw(X'(-l>ure-Cl(aii 

Swiff'sPremium 
Oleomargarine 


Courtesy  of  Swift  &  Co. 
A  Modern  Refrigerator  Car 

The  refrigeration  is  accomplished  by  filling  certain  spaces  with  ice.     A  re- 
frigerator car  for  meat-carrying  is  an  ice-box  on  wheels. 

establishment  with  sufficient  capacity  to  meet  sudden  or  un- 
usual demands,  and  this  meant  that  the  slaughtering  establish- 
ment must  have  its  own  cold-storage  facilities  for  use  in  "equal- 
izing "  supply  and  demand.  These  cold-storage  rooms  could 
be  used  to  accumulate  a  supply  in  anticipation  of  demand  or 
they  could  be  used  for  preserving  a  supply  whose  demand  had 
been  unexpectedly  lessened.  The  refrigerator  car,  the  re- 
frigerating rooms,  and  the  larger  slaughtering  plants  meant  the 
emergence  of  indirect  costs.  As  we  have  seen,  indirect  costs 
make  powerfully  for  an  increase  in  the  size  of  the  business  unit. 
Upon  the  other  hand,  the  refrigerator  car  led  to  the  establish- 


254  OUR   ECONOMIC   ORGANIZATION 

ment  of  branch  packing  plants  in  Kansas  City,  Omaha,  St. 
Joseph,  and  other  western  cities.  If  the  refrigerator  car  was 
to  be  used  at  all  in  shipping,  clearly  the  greatest  economy  would 
result  from  slaughtering  the  stock  as  near  as  possible  to  the 
farms  where  it  was  raised.  These  western  packing  branches, 
accordingly,  followed  the  westward  movement  of  the  cattle- 
raising  industry.  In  fine,  these  developments  meant  big  plants 
and  they  meant  many  plants. 

Difficulties  in  marketing.  —  When  the  Chicago  packers  be- 
gan the  slaughtering  business  on  a  large  scale  it  became  neces- 
sary to  find  methods  of  selling  their  product.  Many  of  their 
former  customers  for  live  stock  would  not  buy  dressed  meats, 
since  they  were  themselves  in  the  slaughtering  business  and  were 
thus  in  competition  with  the  growing  Chicago  industry.  More- 
over, many  people  living  at  a  distance  from  Chicago  doubted 
whether  fresh  meat  could  be  conveyed  to  them  in  an  edible 
condition,  and  their  local  butchers  were  not  slow  to  encourage 
this  doubt.  Much  the  same  situation  existed  in  foreign  lands. 
It  was  difficult  for  an  Englishman  to  believe  that  beef  dressed 
in  Chicago  and  shipped  to  him  by  rail  and  water  could  compare 
with  the  "  roast  beef  of  old  England."  Also  it  was  very  neces- 
sary that  the  fresh  meat  which  was  produced  every  day  in 
Chicago  should  be  efficiently  disposed  of  in  the  consuming 
localities.  Otherwise  car  space  would  be  consumed  for  storage, 
and  dressed  meat  which  could  be  preserved  only  at  great  ex- 
pense would  accumulate.  These  conditions  made  it  desirable 
for  the  Chicago  packers  to  establish  branch  selling  agencies  in 
all  of  the  important  cities  of  this  country  and  abroad.  They 
did  so  and  soon  made  Chicago  dressed  meat  a  recognized  stand- 
ard. These  selling  agencies  of  the  packers  have  grown  in 
number  until  the  larger  concerns  each  have  branch  offices  in  as 
many  as  four  hundred  cities  of  the  United  States  alone.  There 
was  thus  added  to  the  business  of  the  foi-mer  stock  dealers 
a  merchandising  establishment  world  wide  in  scope. 

Nor  was  this  all.  Meat  market  keepers  who  bought  beef  from 
these  agents  in  other  cities  began  to  request  that  they  be  supplied 


MAXIMUM   EFFICIENCY   OF   THE   BUSINESS  UNIT     255 

with  pork,  mutton,  and  other  products  as  well.  The  packers 
were  not  averse  to  doing  this.  Once  their  large  plants  had  been 
built  and  their  marketing  organization  set  up  they  could  handle 
these  other  products  without  much  increase  in  their  overhead 
costs,  and  by  so  doing,  they  were  able  to  sell  each  unit  of  their 
product  at  a  greater  profit,  or  at  a  lower  price,  or  both. 

Overhead  costs  operated  in  another  way  to  induce  the  packers 
further  to  expand  the  size  and  variety  of  their  ventures.  When 
the  refrigerator  cars  were  sent  to  various  parts  of  the  country 
they  were  at  first  returned  empty.  Here,  plainly,  was  a  great 
waste.  It  cost  nearly  as  much  to  haul  the  cars  empty  as  it 
cost  to  haul  them  loaded.  The  packers,  therefore,  looked  about 
for  goods  which  could  be  carried  under  refrigeration  on  the 
return  trip  and  sold  in  Chicago.  A  system  of  buying  was  worked 
out  and  eventually  fruit,  butter,  eggs,  cheese,  and  vegetables 
of  many  sorts  were  being  brought  from  every  part  of  the  country 
in  the  returning  refrigerator  cars.  One  way  of  making  sure  that 
these  goods  could  be  disposed  of  when  they  reached  Chicago 
was  to  establish  a  preserving  and  marketing  organization.  This 
was  done  by  more  than  one  of  the  large  packing  plants.  Thus 
the  demands  of  their  customers  and  the  pressure  of  overhead 
costs  caused  the  packers  to  become  merchants  in  a  great  variety 
of  goods. 

The  use  of  by-products.  —  As  we  have  seen,  the  early 
methods  of  dressing  meat  discarded  much  as  waste.  But 
science  was  busy,  and  discoveries,  one  by  one,  showed  valuable 
uses  which  could  be  made  of  the  parts  of  animals  which  had 
been  thrown  away.  It  was  found  that  the  horns  and  hoofs 
could  be  used  for  buttons  and  for  knife  and  cane  handles ;  dried 
blood  commanded  a  high  price  as  a  fertilizer ;  parts  of  the  bones 
and  cartilage  could  be  turned  into  glue.  A  new  invention  made 
it  possible  to  use  parts  of  the  fat,  hitherto  almost  useless,  for  the 
manufacture  of  oleomargarine.  Eventually,  every  minute  scrap 
of  the  slaughtered  animal  was  put  to  some  profitable  use.  To 
find  a  market  for  some  of  these  by-products,  however,  it  was 
necessary  that  they  be  combined  with  other  articles  into  a 


256 


OUR  ECONOMIC   ORGANIZATION 


manufactured  form.  This  impelled  the  packers  into  a  further 
expansion.  To  utilize  their  glue,  for  instance,  the  manufacture 
of  sand  paper,  which  takes  large  quantities  of  glue,  was  under- 
taken. Soap  factories,  glue  works,  curled  hair  industries,  fer- 
tilizer plants  and  pharmaceutical  laboratories  were  constructed 
to  make  the  use  of  various  by-products  more  profitable. 


Courtesy  of  Swift  &  Co. 

Bird's-eye  View  of  Union  Stock  Yards  To-day 

The  scale  of  operations  is  better  realized  when  one  knows  that  the  stock 
pens  and  packing  plants  occupy  a  space  a  mile  in  length  and  half  a  mile  in 
width. 


Risks  are  reduced.  —  As  the  scale  of  their  operations  ex- 
panded, the  packers  found  that  the  larger  business  unit  enabled 
them  to  carry  more  readily  some  of  the  risks  of  modern  business 
enterprise.  By  the  establishment  of  branch  plants  in  many 
localities  and  even  in  foreign  countries,  as  in  South  America, 
they  tapped  so  many  sources  of  supply  of  raw  materials  that 
unfavorable  conditions  in  some  localities  could  not  disrupt  their 
business  in  the  way  they  could  that  of  a  smaller  producer ;  by 
dealing  in  a  tremendous  range  of  products  they  were  freed  from 
such  serious  risks  of  unfavorable  seasons  as  are  borne  by  the 
dealer  in  a  single  commodity ;  by  occupying  so  large  a  propor- 
tion of  the  field  in  which  they  operated  tliey  were  able  to  secure 


MAXIMUM   EFFICIENCY   OF   THE   BUSINESS  UNIT     257 

more  stable  prices,  both  in  buying  and  in  selling  than  can 
the  small  producer ;  by  having  agencies  in  so  many  communi- 
ties and  by  dealing  in  so  many  products  they  were  better  able 
to  tide  themselves  over  shifts  in  demand  than  is  the  small-scale 
operator  in  a  single  commodity,  and  for  that  matter  their  tre- 
mendous advertising  power  enabled  them  to  control  these  shifts 
to  a  considerable  extent ;  by  having  a  business  of  such  magni- 
tude that  they  could  conduct  scientific  experimentation,  they 
lessened  the  risk  of  their  being  displaced  by  some  new  method 
in  the  hands  of  a  competitor ;  by  the  integration  of  many  pro- 
cesses and  plants,  each  single  step  was  relieved  of  anxiety 
concerning  the  source  of  its  raw  material  and  the  disposal  of 
its  finished  product  —  a  state  of  affairs  quite  different  from  that 
experienced  by  the  small-scale,  isolated  producer.  By  having 
hundreds  of  agencies  over  the  whole  world,  their  information 
with  respect  to  conditions  affecting  their  business  was  much  more 
varied  and  more  accurate  than  the  small  producer  can  ordinarily 
hope  to  secure ;  by  having  their  business  scattered  in  so  many 
localities,  risk  of  serious  disruption  through  political  or  indus- 
trial disorder  was  minimized,  as  were  also  the  risks  from  fire. 

We  must  realize  that  all  this  growth  could  not  have  taken 
place  if  surrounding  conditions  had  not  been  helpful.  The 
background  conditions  of  the  growth  of  the  packing  industry 
were  in  society  at  large  —  were  in  the  social  environment. 
Many  factors  in  the  social  environment  aided  the  growth  of  the 
packing  industry.  Means  of  communication  and  transporta- 
tion that  made  possible  large  markets  and  wide  sources  of  sup- 
ply; a  stable,  orderly  condition  of  political  society  that  made 
the  rights  of  property  secure ;  a  development  of  science  that 
enabled  the  solution  of  knotty  technical  problems ;  a  financial 
organization  of  society  which  could  care  for  the  amassing  and 
handling  of  large  funds ;  codes  of  business  law  and  business 
ethics ;  emerging  principles  of  business  administration  —  these 
and  many  other  features  of  our  social  environment  were  as 
truly  a  part  of  the  story  of  the  packing  industry  as  was  the 
refrigerator  car. 


258  OUR  ECONOMIC   ORGANIZATION 

Thus  the  business  of  meat  packing  developed  from  simple 
beginnings  into  one  of  tremendous  size.  But  notice  that  its 
expansion  shows  three  different  forms  of  growth.  It  is  large 
scale  in  the  sense  that  each  of  the  various  plants  is  large.  It  is 
large  scale  in  the  sense  that  there  are  combined  under  a  single 
management  several  plants  doing  the  same  kinds  of  work.  It  is 
large  scale  in  the  sense  that  series  of  processes  have  been  "  inte- 
grated "  into  one  concern.  To-day  at  least  two  of  the  largest 
packing  companies  have  resources  of  over  $200,000,000  each. 
One  of  the  largest  operates  27  vast  plants  covering  a  total  of 
200  acres,  with  a  daily  killing  capacity  of  55,000  animals.  Forty- 
five  thousand  workers  are  employed  by  this  company,  which  sells 
400  different  products  through  416  branch  offices  in  this  and 
in  at  least  12  foreign  countries.^ 

This  story  of  the  development  of  the  packing  industry  is  not 
concerned  with  the  fact  that  the  packers  have  been  forced  by 
the  Federal  government  to  disassociate  some  of  their  various 
enterprises.  We  are  just  now  concerned  only  in  seeing  how  a 
business  may  have  incentives  to  become  a  large-scale  business. 

The  rise  of  the  United  States  Steel  Corporation.  —  The 
steel  industry  furnishes  another  excellent  example  of  expanding 
business  units.  One  small  plant,  worth  about  $5000,  began 
manufacturing  iron  at  Allegheny  in  1858.  By  1865,  it  had 
combined  with  other  iron  forges  and  was  worth  about  $300,000. 
Andrew  Carnegie  had  by  this  time  become  the  most  important 
director  of  this  concern.  Rapidly  the  company  used  the  policy 
of  consolidation  and  integration.  Iron  mills  were  combined 
with  blast  furnaces,  Bessemer  steel  converters,  coke  ovens, 
coal  lands,  and  factories  for  making  steel  rails,  beams,  bars  and 
angles.  In  1892,  the  various  so-called  "  Carnegie  interests  " 
were  capitalized  at  $25,000,000.  Still  farther  went  the  process 
of  integration.  Railroads  that  were  important  in  the  shipment 
of  ore  were  pin-chased,  ore  docks  wore  built  on  the  lakes,  ma- 
chinery for  unloading  ore  ships  was  installed,  and  a  branch 
company  was  organized  to  build  a  great  fleet  of  boats  for  hauling 

'  Figures  furnisliod  liy  the  Cominercial  Research  Department  of  Swift  &  Company. 


MAXIMUM   EFFICIENCY   OF   THE   BUSINESS  UNIT     259 

ore.  A  further  step  was  taken  when  extensive  ore  fields  of  the 
Lake  Superior  region  were  purchased.  Thus  the  control  of 
steel  manufacture  from  the  ore  fields  to  the  finished  steel  rail 
was  completed  by  the  Carnegie  Company. 

In  the  meantime,  other  steel  companies  had  also  been  grow- 
ing. The  immense  amount  of  machinery  of  all  these  companies 
made  their  indirect  costs  extremely  high,  and  caused  them, 
in  times  of  slack  business,  to  engage  in  such  severe  competition 
that  it  became  of  the  cutthroat  variety.  This  situation  was 
relieved  when,  in  1901,  a  number  of  the  larger  competitors  of 
the  Carnegie  Company  joined  with  it  and  formed  a  gigantic 
concern,  called  the  United  States  Steel  Corporation.  As  then 
organized,  this  company  owned  149  steel  works ;  extensive  prop- 
erties of  ore,  coal,  limestone,  and  gas ;  more  than  100  boats  on 
the  Great  Lakes ;  and  over  1000  miles  of  railroad.  The  property 
was  capitalized  at  $1,400,000,000. 

Its  growth  since  1901  has  been  such  that  it  continues  to  fur- 
nish an  excellent  illustration  of  our  use  of  concentrated  business 
as  a  means  of  production.  A  tremendous  amount  of  our  social 
energy  is  used  each  year  by  this  giant  mechanism.  In  1916  it 
absorbed  33,000,000  tons  of  ore  and  the  work  power  of  250,000 
people.  In  return  it  gave  us  somewhere  about  half  of  our  total 
supply  of  steel  ingots,  billets,  rails,  castings,  nails,  plates,  struc- 
tural shapes,  sheet  steel,  wire  rods,  and  tin  plate.  The  total 
value  of  these  was  placed  at  $850,600,000. 

These  cases  illustrate  forms  of  growth.  —  At  the  beginning 
of  this  chapter  was  the  statement  that  there  has  been  a  phenom- 
enal growth  in  the  size  of  business  units  since  the  Industrial 
Revolution.  These  examples  are  not  meant  to  show  that  all 
industries  have  become  large.  They  are  meant  to  show  that 
there  have  been  strong  forces  making  for  larger  business  units 
and  that  where  there  has  been  increase  in  size  this  increase  of 
size  has  typically  taken  one  or  more  of  three  forms.  (1)  In 
some  cases  individual  plants,  whether  in  primary  industries 
or  in  manufacturing  or  in  commerce,  have  become  giants.  In 
certain  lines  of  industry  this  increase  of  the  size  of  individual 


260 


OUR   ECONOMIC   ORGANIZATION 


plants  has  gone  so  far  that  notwithstanding  a  tremendous  in- 
crease in  output  the  total  number  of  separate  plants  has  shrunk. 
The  iron  and  steel  industry  is  a  good  illustration  of  this  situation. 


1850 

1S60 

1870 

1880 

1890 

1900 

1910 

Number  of 

establish- 

ments    . 

468 

542 

726 

699 

699 

668 

654 

Average 

product 

$43,600 

$97,000 

$275,000 

$419,000 

$683,000 

$1,203,500 

$2,119,000 

Average 

capital   . 

$46,700 

$82,000 

$161,000 

$295,000 

$591,000 

$    858,000 

$2,282,000 

Average 

number  of 

employees 

53 

65 

103 

197 

250 

333 

426 

Percent- 
age In- 
crease 
1910 

OVER 

1850 


40 
4,760 

4,787 


704 


The  Increasing  Size  of  Iron  and  Steel  Plants 

(2)  In  Other  cases,  there  is  large-scale  production  in  the  sense 
of  having  under  a  single  management  several  plants  doing  the 
same  kind  of  work,  each  of  which  is  itself  likely  to  be  quite  large. 
The  packing  industry,  a  "  chain  "  of  hotels,  or  of  ten-cent  stores, 
is  a  case  in  point.  Such  large  business  units  represent  "  hori- 
zontal grouping  "  or  "  side  by  side  grouping  "  of  "  like  plants." 

(3)  In  still  other  cases  the  large  size  has  resulted  from  knitting 
together  under  one  control  plants  or  processes  that  formerly 
were  independent  units  in  some  sequence  or  series  (see  Study  IX) 
of  production.  For  example,  the  United  States  Steel  Corpora- 
tion includes  plants  and  processes  constituting  several  such 
series.  It  owns  ore  mines,  lake  boats,  rail  systems,  smelters, 
steel  mills,  and  all  the  other  facilities  necessary  to  carry  from 
the  very  beginning  to  the  end  the  production  of  a  keg  of  nails 
or  an  iron  bridge.  This  is  called  "  integration  of  industry  "  or 
"  vertical  grouping." 

The  fields  of  the  activities  of  the  large  business  unit.  —  The 
meat  packing  and  the  steel  industries,  moreover,  are  illustrations 
of  a  fairly  widespread  tendency  toward  larger  units  of  business. 


MAXIMUM   EFFICIENCY   OF   THE   BUSINESS  UNIT     261 

"Almost  all  departments  of  brass  work,  cutlery,  foundry  supplies, 
hardware,  the  special  iron  and  steel  trades,  jewellery,  musical  instru- 
ments, sewing  machines,  foe-arms,  shipbuildmg,  come  mider  this 
economy  of  large  production;  other  trades  conforming  in  a  very 
marked  degree  to  the  same  law  are  boots  and  shoes  (factory  products), 
bricks  and  tiles,  carriages  and  cars,  chemicals,  clocks,  cooperage, 
leather,  saddlery,  malt  liquors,  paper  and  wood  pulp,  pottery,  soap 
and  candles,  smoking  tobacco,  umbrellas. 

"It  is,  however,  not  to  manufacture,  but  to  transport  industry  that 
we  must  look  for  the  most  conspicuous  results  of  the  concentrative  in- 
fluence of  machinery.  The  substitute  of  the  railroad  for  the  pack- 
wagon  and  the  stage-coach,  of  the  steamship  for  the  sailing-vessel, 
exhibits  the  largest  advance  of  modern  capitalism. 

"Next  to  transport,  the  department  of  business  where  the  concen- 
trative forces  are  in  strongest  and  most  general  operation  is  finance, 
using  that  term  to  cover  banking  and  insurance,  stockbroking,  bill- 
broking  and  money-lending  of  every  Idnd. 

"  These  monetary  businesses  formed  the  cradle  of  modern  capitalism ; 
they  were  the  earliest  to  adopt  the  form  of  joint-stock  enterprise,  and 
to  assume  an  international  area  of  operation ;  capital  expands  in  them 
out  of  all  relation  to  labor,  and  the  advantage  of  a  large  capital  over  a 
small  capital  is  normally  greater  than  in  any  other  business  operation. 

"The  concentrative  forces  in  commerce  are  less  easily  ascertained; 
but,  as  regards  wholesale  operations,  there  can  be  no  doubt  that  an 
increasing  proportion  of  the  distributive  business  is  passing  into  the 
hands  of  large  and  growing  firms.  Over  a  considerable  area  of  whole- 
sale trade,  the  separate  mercantile  stage  has  been  eliminated,  especially 
where  the  goods  in  question  are  raw  materials  or  unfinished  manufac- 
tures. Either  the  manufacturer  purchases  his  materials  direct  from  the 
producers,  ...  or  sets  up  producing  plants  of  his  own,  as  where  jam 
manufacturers  own  fruit  plantations  or  iron-works  acquire  collieries. 
Li  many  other  cases  the  producer  suppUes  the  retailer  direct. 

"The  appHcation  of  joint-stock  enterprise  to  retail  trading  goes  on 
apace.  Gigantic  stores  tending  to  become  'universal  providers,'  .  .  . 
or  covering  a  wide  area  of  wants,  .  .  .  spring  up  in  large  cities,  taking 
an  increasing  proportion  of  retail  business.  Other  companies,  more 
specialized,  extend  their  business  through  numerous  branches,  as  in  the 
grocery  and  provision  trades,  milk,  restaurants,  fish  and  game  trades. 
In  some  of  these  cases  the  retail  companies  strengthen  themselves  by 


262  OUR  ECONOMIC   ORGANIZATION 

entering  the  productive  processes  of  farming  and  manufacture ;  more 
frequently  the  manufacturers  themselves  acquire  retail  stores  or  oper- 
ate through  'tied'  shops,  as  in  the  shoe,  jewellery  and  tobacco  trades. 

"All  general  measui'ements  of  the  concentrative  forces  of  capitalism 
as  appUed  to  agriculture  are  extremely  difficult  to  compass. 

"  In  such  countries,  however,  as  the  United  States,  where  agricultural 
machinery  has  been  very  fully  applied,  it  is  clearly  established  that 
the  size  and  value  of  farms  increase  in  those  departments  of  agricul- 
ture where  machinery  can  be  most  largely  utilized."  ^ 

The  advantages  of  the  large  busmess  unit.  —  Our  survey 
of  the  rise  of  the  packing  industry  makes  it  possible  for  us  to 
list  in  brief  form  the  more  important  advantages  which  our  large 
business  units  enjoy. 

The  first  great  group  of  advantages  centers  around  the  lowered 
costs  of  production  arising  from  such  factors  as  these :  (1)  the 
spreading  of  the  indirect  costs  of  a  business  over  a  large  number 
of  units  of  business ;  (2)  the  better  utilization  of  the  principle 
of  division  of  labor  in  the  organization  of  the  business ;  (3)  the 
better  mechanical  equipment  which  large  firms  can  afford  to 
buy  because  they  can  spread  the  cost  over  more  business ;  (4) 
cheaper  power  arising  from  the  fact  that  power  can  usually  be 
produced  more  cheaply  per  unit  when  produced  in  large  quan- 
tities ;  (5)  better  utilization  of  waste,  either  through  selling  it 
in  large  quantities,  or  through  the  development  of  by-products ; 
(6)  the  regulation  of  production  by  running  some  plants  to  full 
capacity,  which  is  generally  economical,  and  closing  down  other 
plants  in  seasons  of  short  demand ;  (7)  the  maintenance  of 
scientific  laboratories  leading  to  continual  improvements  in 
methods  and  processes. 

A  second  group  of  advantages  centers  about  the  greater  ability 
of  the  large  concerns  to  bear  risks.  This  has  already  been  dis- 
cussed in  sufficient  detail.     (See  p.  250.) 

The  third  group  of  advantages  has  to  do  with  the  market,  in- 
cluding both  purchasing  and  selling,  and  embraces  such  matters 
as  the  following:  (1)  purchasing  over  a  wide  area  enables  the 

'  J.  A.  Hobson,  The  Evolution  of  Modern  Capitalism,  pp.  117-122. 


MAXIMUM   EFFICIENCY   OF  THE   BUSINESS  UNIT     263 

concentration  of  purchases  in  the  most  favorable  market  under 
the  most  favorable  conditions ;  (2)  there  is  greater  probability  • 
of  regular  demand  for  products  when  the  scope  of  operations 
is  great,  either  with  respect  to  the  territories  involved  or  to  the 
wide  range  of  commodities ;  (3)  goods  may  be  advertised  more 
effectively,  for  advertising  cost  can  be  spread  over  a  larger  num- 
ber of  units  of  product ;  (4)  lower  transportation  charges 
can  usually  be  secured  (a)  by  shipment  in  large  quantities,  since 
carload  lots  have  lower  rates  than  less  than  carload  lots,  (6)  by 
distributing  plants  in  various  parts  of  the  country  so  that  the 
haul  to  the  market  will  be  a  short  one  —  this  is  sometimes  called 
the  saving  of  cross  freights ;  (5)  resources  are  available  for  the 
development  of  distant  markets,  and  this  may  be  highly  im- 
portant from  the  point  of  view  of  spreading  indirect  cost  over 
more  units ;  (6)  through  integration,  the  "  market  "  connec- 
tions of  each  unit  are  secured. 

The  fourth  group  of  advantages  has  to  do  with  the  adminis- 
tration of  the  business  and  includes  :  (1)  the  ability  of  the  large 
concern  to  pay  the  amount  necessary  to  secure  a  high-grade 
manager ;  (2)  a  corresponding  ability  to  secure  high-grade  men 
in  the  subordinate  positions,  such  as  purchasing  agents,  sales- 
men, labor  administrators,  etc. ;  (3)  a  corresponding  ability 
to  employ  high-grade  technological  experts,  such  as  chemists, 
geologists,  and  accountants ;  (4)  the  ability  to  reduce  the  ex- 
penses of  administration  by  eliminating  some  employees,  for 
example,  when  integration  eliminates  the  purchasing  and  sales 
agents  who  formerly  made  connections  between  two  of  the  units 
or  processes  which  are  integrated. 

The  small  firm  still  persists.  —  In  spite  of  all  these  advan- 
tages the  small  firm  still  persists  in  many  industries  and  we  have 
no  reason  to  suppose  that  it  is  fated  to  disappear.  Its  hold 
is  particularly  strong  where  either  the  raw  materials  or  the 
processes  concerned  are  not  capable  of  standardization,  for 
large-scale  industry  necessarily  depends  upon  standardization 
and  routine.  It  has  a  firm  grip  also  in  those  industries  where 
varying  individual  tastes  of  consumers  must  be  met ;  or  wher- 


264  OUR  P]CONOMIC   ORGANIZATION 

ever  the  personal  relation  between  buyer  and  seller  is  highly 
important.  In  producing  "  fitted  "  clothes,  fine  rugs,  elabo- 
rately bound  books,  high-grade  furniture,  and  all  forms  of  art 
work,  the  small  business  unit  continues  to  hold  its  own.  Then, 
too,  many  small  firms  grow  up  as  satellites  of  large  plants.  On 
the  flanks  of  the  great  packing  houses,  for  instance,  are  a  swarm 
of  smaller  concerns  that  thrive  by  making  repairs,  building 
means  of  conveyance,  using  surplus  by-product  materials,  and 
in  other  ways  making  themselves  complementary  to  the  larger 
concerns. 

Even  in  the  fields  which  we  have  come  to  consider  particu- 
larly appropriate  to  "  big  business  "  the  small  firm  has  by  no 
means  disappeared.  Sometimes  it  is  favored  by  public  opinion, 
and  thus,  through  its  customers  rallying  to  its  support,  secures 
stability  of  demand.  It  always  possesses  the  advantage  of 
having  its  management  in  more  intimate  and  personal  touch 
with  detail  than  can  ever  be  the  case  with  the  large  business 
unit ;  its  employees  are  likely  to  take  a  keener  and  more  in- 
telligent interest  in  its  affairs  than  will  the  employees  of  the 
routinized  large-scale  businesses. 

What  is  the  size  of  maximum  efficiency  ?  —  Let  us  again  re- 
call to  our  minds  the  fact  that  in  this  lesson  we  are  not  pri- 
marily concerned  with  monopolies  or  trusts.  They  are  to  be 
considered  later.  (See  Study  XVII.)  The  size  of  maximum  effi- 
ciency of  a  business  unit  may  or  may  not  be  reached  before  it 
practically  controls  its  field  and  is  thus  called  a  monopoly. 
What  is  the  size  of  maximum  efficiency  in  modern  business? 
There  is  no  definite  answer.  It  varies  from  time  to  time  and 
from  industry  to  industry.  It  depends  upon  the  technique  of 
production,  upon  the  market  and  the  administration  of  the 
market,  upon  the  technique  of  business  administration,  and  all 
these  factors  reach  far  back  into  the  general  social  environment. 
There  is,  therefore,  no  fixed  goal  with  respect  to  the  size  of  maxi- 
mum efficiency.  The  goal  has  been  up  to  this  time  a  rapidly 
changing  one. 


MAXIMUM   EFFICIENCY   OF  THE   BUSINESS  UNIT    265 

PROBLEMS 

1 .  Distinguish  between  large  production  and  large-sca^c  production. 
In  which  did  the  clothier  of  the  domestic  system  engage  ? 

2.  In  the  table  on  page  260  how  do  you  explain  the  increase  in  the 
number  of  estabUshments  up  to  1870  and  its  decrease  thereafter? 
Was  it  because  the  demand  for  iron  and  steel  fell  off? 

3.  Name  some  cases  of  business  units  of  large  size  which  are 
not  monopolies.  Are  large-scale  production  and  monopoly  synony- 
mous? 

4.  In  the  development  of  the  packing  industry  cite  cases  where 
they  sought"  to  secure  the  larger  business  unit  in  order  to  save  in  the 
costs  of  manufacture. 

5.  Cite  cases  where  they  sought  to  increase  the  size  of  the  business 
unit  in  order  to  improve  their  relationsliip  to  the  market. 

6.  Cite  cases  where  they  reduced  risks  by  increasing  the  size  of 
the  business  unit. 

7.  What  type  or  types  of  concentration  are  represented  by  the  pack- 
ing plants  ?  By  the  United  States  Steel  Corporation  ?  By  a  depart- 
ment store? 

8.  Give  examples  of  the  integration  of  industry  in  mining;  in 
manufacturing ;  in  selling. 

9.  Keeping  in  mind  that  concentration  is  a  relative  term  (a  business 
unit  is  "large"  as  compared  with  others),  what  are  the  large-scale 
business  organizations  in  your  community? 

10.  "The  refrigerator  car  caused  the  packing  industry  to  be  lo- 
cated in  the  West."     Explain  what  is  meant  by  this  statement. 

11.  "The  invention  of  the  refrigerator  car  almost  forced  Chicago 
meat  packers  to  integrate  slaughtering  with  bujang  and  selling." 
Explain. 

12.  What  would  you  list  as  the  overhead  charges  involved  in  send- 
ing out  salesmen  to  sell  goods?  Is  it  true  that  the  more  lines  a  sales- 
man carries,  the  less  will  be  the  cost  per  unit  of  business  done  ?  Is  this 
true  for  an  indefinite  number  of  lines? 

13.  For  which  of  the  following  articles  is  a  large-scale  producing 
plant  appropriate  :  hand-made  shoes ;  machine-made  shoes;  jewelry; 
nails;  cut  glass;  orchids;  mowing  machines? 


266  OUR   ECONOMIC   ORGANIZATION 

14.  What  advantages  has  a  large  store  such  as  Marshall  Field's, 
or  Wanamaker's,  over  a  small  shop? 

15.  Is  the  mail  order  house  an  illustration  of  large-scale  production  ? 
What  factors  have  made  the  mail  order  house  possible?  Answer  the 
same  questions  for  the  department  store. 

16.  Is  it  likely  that  large  factories  will  ever  be  devoted  to  portrait 
painting?    Give  reasons. 

17.  Look  through  the  list  of  advantages  of  the  large  business  unit 
given  on  page  262,  asking  yourself,  in  the  case  of  each  advantage,  whether 
a  business  must  have  a  monopoly  in  order  to  secure  that  advantage. 

18.  A  financial  statement  published  by  certain  packers  showed 
that  during  one  year  the  average  price  paid  for  a  thousand-pound 
steer  was  $62.50.  The  meat  from  such  a  steer  was  sold  for  $58.65, 
which  is  nearly  $4  less  than  was  paid  for  the  live  animal.  How  could 
this  be  true  ? 

19.  A  country  butcher  recently  said,  "I  don't  imderstand  how 
Chicago  packers  can  sell  meat  cheaper  than  I  can.  They  pay  ten  cents 
more  an  hour  to  get  their  slaughtering  done.  How  can  they  still  under- 
sell me?"     Can  you  explain  it  to  him  ? 

20.  "Large  concerns  can  usually  buy  cheaper  and  sell  lower." 
Why  can  a  concern  afford  to  sell  more  cheaply  in  large  quantities? 
Why  can  it  buy  at  a  lower  price  by  buying  in  large  quantities? 

21.  Examine  the  pages  of  any  magazine  and  pick  out  one  or  two 
articles  for  which  a  demand  has  been  created  by  means  of  advertising. 
Why  is  a  large  concern  at  an  advantage  in  creating  a  demand  by  this 
method?  Is  it  desirable  from  the  point  of  view  of  society  that  such 
demand  should  be  created?     (See  p.  380.) 

22.  Should  you  expect  large-scale  production  to  be  more  successful 
in  the  manufacture  of  walking  shoes,  or  of  women's  hats  ?    Why  ? 

23.  Why  do  the  custom  tailor  and  dressmaker  continue  to  have 
trade?  Why  does  not  some  enterprising  American  open  a  factory 
for  manufactm"ing  oriental  rugs? 

24.  Are  there  any  disadvantages  in  large-scale  production?  If 
so,  are  they  disadvantages  to  the  worker ;  to  society ;  to  the  managing 
owner;   to  consumers? 

25.  Are  watches  produccnl  by  the  factory  cheaper  than  those  made 
by  hand?     If  so,  are  they  as  good?     Must  the  wages  of  the  factory 


MAXIMUM   EFFICIENCY   OF   THE   BUSINESS   UNIT     267 

workman  be  lower  than  those  of  the  craftsman?     Must  the  capital 
invested  be  larger? 

26.  "The  size  of  maximum  efficiency  depends  in  part  upon  the 
technique  of  production."     Explain. 

27.  "The  size  of  maximum  efficiency  depends  upon  the  market  and 
the  administration  of  the  market."     Explain. 

28.  "The  size  of  maximum  efficiency  depends  in  part  upon  the 
technique  of  business  administration."     Explain. 

29.  Make  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

"  Marshall,  Readings  in  Industrial  Society:  pp.  634-640,  Selections 
252-258. 

Bureau  of  Education,  Lessons  in  Coinnmnity  and  National  Life: 
Series  A,  Lesson  A-25,  Wright,  "  The  Integration  of  the  Greatest 
Manufacturing  Concern  in  the  United  States." 
Lesson  A-26,  Clark,  "Concentration  and  Control  in 
the  Railroad  Industry." 
Series  B,  Lesson  B-26,  Duncan,  "  Concentration  in  the  Market- 
ing of  Citrus  Fruits." 


STUDY  XVI 
THE  MORE  USUAL  TYPES  OF  BUSINESS  UNITS 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  the  various  types  of  business  organization  which  we  use  in 

directing  our  social  resources  to  the  production  of  want-gratifying 
goods. 

2.  To  get  some  idea  of  the  circumstances  under  which  each  type  is 

appropriately  used. 

When  the  business  man  has  decided  that  it  will  be  profitable 
to  go  into  business,  that  is,  to  direct  social  resources  to  pro- 
ducing some  form  of  economic  goods,  one  of  the  first  matters  in 
which  he  is  interested  is  the  type  of  business  organization  which 
he  should  use. 

The  individual  firm.  —  The  experience  of  a  young  man  who, 
a  few  years  ago,  went  into  the  printing  business  shows  how 
different  types  of  business  organization  are  adapted  to  various 
needs.  This  man  had  been  employed  as  a  works  manager  in 
a  huge  printing  establishment.  He  saw  that  his  employer  was 
making  money  and  decided  that  he  himself  knew  the  business 
well  enough  and  had  sufficient  business  ability  to  become  an 
organizer.  During  his  years  of  work  as  an  employee,  he  had 
saved  enough  money,  to  rent  a  small  building  and  to  buy  the 
machinery  necessary  to  begin  work.  He  was,  of  course,  familiar 
with  printing  machinery  and  he  could  quite  readily  decide  what 
machines  would  be  best  for  a  small  shop  and  how  they  could 
best  be  arranged. 

Before  he  could  begin  work  it  was  necessary  for  him  to  buy 
materials,  such  as  paper  and  ink.  He  found  that  he  was  not 
very  well  trained  for  making  these  purchases.  His  work  had 
taught  him  a  great  deal  about  conducting  the  operations  inside 

268 


MORE    USUAL   TYPES   OF   BUSINESS   UNITS        269 

the  plant,  but  it  had  not  given  him  much  information  concern- 
ing the  places  from  which  materials  came  or  the  prices  which 
should  be  paid  for  them.  It  was  only  after  a  great  deal  of 
difficulty  that  he  made  satisfactory  contracts  for  the  delivery 
of  materials  at  his  plant.  He  was  even  more  handicapped 
in  the  matter  of  procuring  orders  for  printing.  He  had  learned 
almost  nothing  about  this  phase  of  the  business.  But  after 
many  mistakes  he  secured  a  fair  and  steadily  growing  volume  of 
orders. 

After  he  had  conducted  his  business  several  months,  he 
discovered  that  his  funds  were  getting  low.  Curiously  enough, 
they  were  getting  low  because  his  business  was  growing  so 
rapidly.  He  had  used  most  of  his  sayings  in  buying  his  machin- 
ery, his  "  fixed  capital,"  as  business  men  call  it.  His  running 
expenses,  such  as  those  for  light,  heat,  materials,  and  wages  of 
workmen,  had  to  be  met  at  regular  intervals,  and  these  amounts 
were  steadily  increasing.  Of  course  the  amounts  due  from  his 
customers  were  also  getting  larger,  but  he  had  to  meet  most 
of  his  expenses  prior  to  the  delivery  of  goods  to  customers. 
His  customers  were  ''  slow "  in  making  payments ;  others 
paid  regularly  at  the  end  of  thirty  days  after  he  had  fin- 
ished his  work  for  them.  Increasingly  he  found  his  business 
"  cramped  "  by  his  too  slender  margin  of  "  working  capital." 

In  this  emergency  he  went  to  a  bank  and  asked  for  a  loan. 
The  banker  after  making  an  investigation  of  the  business  and 
of  the  reputation  of  the  owner,  decided  to  grant  the  loan. 
With  the  money  thus  procured  the  manager  was  able  to  con- 
tinue his  business  successfully.  By  the  end  of  the  first  year 
he  had  repaid  the  bank,  and  he  found  that  it  was  unnecessary 
to  repeat  this  particular  loan,  for  he  was  making  profits  and  he 
"  put  his  profits  back  into  the  business." 

He  had  not  deceived  himself  into  believing  he  was  making 
more  profits  than  was  really  the  case.  He  counted  as  profits 
only  the  amount  which  remained  after  he  had  met  all  his 
running  expenses ;  had  set  aside  a  sum  to  cover  depreciation 
of  his  machinery  and  other  equipment  due  to  wear  and  tear 


270  OUR  ECONOMIC   ORGANIZATION 

and  to  obsolescence ;  had  paid  himself  a  reasonable  sum  for  his 
own  labor ;  and  had  taken  account  of  the  interest  on  his  invest- 
ment. Everything  considered,  his  success  for  the  first  year 
had  been  little  short  of  remarkable. 

The  partnership.  —  In  thinking  back  over  his  experiences 
of  the  year,  and  in  forecasting  the  situation  which  faced  him  in 
the  coming  year  with  a  rapidly  expanding  business,  he  came  to 
the  conclusion  that  it  would  be  better  for  him  to  take  in  a 
partner,  particularly  if  he  could  find  one  expert  in  buying  and 
selling,  so  that  he  could  devote  his  own  attention  to  managing 
the  shop.  A  salesman  of  another  printing  establishment,  who 
had  accumulated  a  savings  account,  seemed  a  desirable  partner 
and  he  was  induced  to  join  the  business.  The  two  men  con- 
sulted a  lawyer,  who  drew  up  for  them  a  simple  partnership 
agreement  stating  in  a  clear  way  the  work  to  be  done  by  each 
of  them,  the  amount  of  money  which  each  had  invested,  and 
the  agreement  that  profits  and  losses  arising  from  the  business 
should  be  shared  equally. 

The  Partnership  Articles 

James  E.  Smith  and  John  Perkins,  both  of  the  city  of  Chicago, 
Illinois,  hereby  mutually  agree  to  become  partners  under  the  fo-m 
name  of  "Smith  and  Perkins"  to  conduct  the  trade  and  business  of 
printing  in  the  said  city  for  the  period  of  five  years  from  date. 

The  said  Smith  invests  his  stock  of  presses,  paper,  ink  and  other 
material,  estimated  to  be  worth  ten  thousand  dollars  ($10,000),  and 
the  said  Perkins  invests  ten  thousand  dollars  ($10,000)  in  cash. 

Both  partners  shall  give  their  entire  time  and  shall  share  losses  and 
gains  equally. 

All  amounts  earned  or  received  by  either  partner  for  work,  materials, 
or  anything  pertaining  to  the  business,  shall  be  deposited  in  the  Corn 
Exchange  National  Bank  of  Chicago  in  the  name  of  both  partners, 
and  shall  be  check(;d  out  as  needed  for  expenses  and  supplies  by  the 
signatur(!s  of  both  partners ;  and  an  equal  amount  shall  be  drawn 
each  Monday  morning  for  each  partner  for  salary  and  personal  ex- 
penses, but  a  balance  of  five  hundred  dollars  ($500)  shall  always  be 
kept  and  held. 


MORE   USUAL   TYPES   OF   BUSINESS  UNITS        271 

When  the  firm  shall  be  dissolved  the  balance  on  hand  shall  be 
divided  equally,  and  all  debts  shall  be  paid  from  the  money  in  bank, 
after  which  the  money  shall  be  divided  equally  between  the  partners. 

Witness  our  hands  and  seals  this  sixth  day  of  September,  nineteen 
thirteen, 
Attest :  James  E.  Smith  (L.S.) 

M.  J.  Jones  John  Perkins  (L.S.) 

The  lawyer  made  it  clear  to  them  that  laws  had  been 
developed  which  made  it  possible  for  men  to  form  the  types  of 
business  organization  which  would  be  most  useful  in  carrying 
on  their  enterprises.  "  It  is  because  there  are  such  rules 
of  the  game,"  said  he,  "that  we  are 'able  to  deal  with  one 
another  with  confidence.  In  a  partnership,  such  as  you  have 
formed,  each  partner  becomes,  as  it  were,  an  agent  of  the  other. 
An  agent,  acting  within  the  scope  of  his  authority,  binds  his 
principal.  If  either  of  you  makes  an  agreement  with  other 
persons,  concerning  a  matter  of  your  business,  both  of  you  are 
bound.  Furthermore,  if  your  firm,  as  your  partnership  is  called 
at  law,  is  not  successful  in  its  undertakings,  each  of  you  may 
be  held  liable,  if  it  is  necessary  to  pay  your  creditors,  not  only 
for  the  amount  you  have  put  into  this  business,  but  also  for 
whatever  may  be  necessary  out  of  any  other  money  or  property 
which  either  of  you  possesses." 

The  new  firm  was  very  successful.  With  each  partner  devot- 
ing his  time  to  the' field  in  which  he  was  a  specialist,  substantial 
gains  were  made.  At  times  there  were  disagreements  about 
the  right  method  of  conducting  the  general  affairs  of  the  busi- 
ness, but  more  often  the  discussions  of  the  two  men  resulted  in 
better  business  policies  than  either  would  have  formulated 
alone.  Once  during  the  year  it  was  necessary  to  borrow  some 
money  from  the  bank.  On  this  occasion  the  banker  was  more 
ready  to  make  the  loan  than  he  had  been  the  j^ear  before. 
The  business  was  now  much  better  established,  and  the  prom- 
ise of  two  men,  where  each  was  "  unlimitedly  liable,"  made 
the  banker  more  confident  that  the  money  would  be  repaid. 

The   corporation.  —  The   business    continued    to    grow.     It 


272  OUR  ECONOMIC   ORGANIZATION 

became  wise  to  take  in  a  third  and  then  a  fourth  partner,  and 
presently  the  amount  of  money  invested  in  the  business  was 
$100,000.  Somewhat  unexpectedly  an  opportunity  arose  which, 
if  grasped,  would  involve  practically  doubling  their  investment. 
Each  of  the  partners  had  saved  some  money  from  the  profits  of 
the  business,  but  they  did  not  have  nearly  enough  to  make 
the  changes  desired.  They  hesitated  to  take  in  more  partners, 
for  since  one  partner  may  bind  all,  the  partnership  relation  is 
a  very  personal  one  and  not  to  be  entered  upon  lightly.  In 
this  situation  they  again  consulted  their  lawyer,  and  he  advised 
them  to  form  a  corporation.  In  talking  with  them  he  said 
substantially  this :         ♦ 

"It  is  easy  and  inexpensive  to  form  a  corporation  and  to  get  all  the 
money  that  is  necessary  to  expand  your  business.  We  should  first 
secure  certain  blanks  from  the  Secretary  of  State  at  the  state  capital ; 
these  must  be  filled  out  giving  your  names  and  addresses  as  incorpora- 
tors, the  name  of  the  new  company,  the  purpose  for  which  it  is  to  be 
formed,  the  principal  place  at  which  it  will  transact  business,  the 
amount  of  money  which  is  to  be  invested,  the  way  in  which  this  money 
is  to  be  obtained,  and  some  statements  regarding  the  way  the  new 
company  will  be  managed.  After  this  information  is  filed  with  the 
proper  state  officers,  we  shall  be  given  a  charter  or  certificate  of  incor- 
poration. Here  is  a  sample  of  such  a  charter  or  certificate  of  incor- 
poration issued  under  the  laws  of  one  state." 

Certificate  of  Incorporation 
We,  the  undersigned,  in  order  to  form  a  corporation  for  the  purposes 
hereinafter  set  forth,  under  and  pursuant  to  the  provisions  of  the  act 
of  the  legislature  of  the  State  of  entitled  "An  Act 

Concerning  Corporations,"  and  the  acts  amendatory  thereof,  and  sup- 
plemental thereto,  do  hereby  certify  as  follows : 

Article  I 
The  name  of  the  corporation  is : 

Article  II 
The  principal  and  registered  office  of  the  company  is  in 
and  the  name  of  the  agent  therein,  and  in  charge  thereof,  and  upon 
whom  process  against  this  corporation  may  be  served,  is : 


MORE   USUAL   TYPES   OF  BUSINESS   UNITS        273 

Article  III 

The  objects  for  which  the  corporation  is  formed  are  :  (ordinarily  this 
is  a  simple  statement,  but  it  may  be  very  broad  and  comprehensive,  as 
in  the  case  of  the  United  States  Steel  Corporation) . 

Article  IV 

The  following  provisions  for  the  regulation  of  the  business  and  the 
conduct  of  the  affairs  of  the  company  are  hereby  established :  (Here 
followed  certain  statements  concerning  the  powers  of  the  Board  of 
Directors,  concerning  the  place  of  meeting  of  the  Board,  and  concern- 
ing use  of  earnings.  It  was  pointed  out  that  certain  regulations  could 
be  stated  in  the  by-laws.) 

Article  V 

The  company  shall  be  authorized  to  issue  capital  stock  to  the  amount 
of  dollars.     The  number  of  shares  of  which  the  capital  stock 

shall  consist  is  shares  of  the  par  value  of        dollars  each.     (If 

preferred  stock  is  desired,  insert  provision  therefor  at  this  point.) 

Article  VI 

The  names  and  post  oflBce  addresses  of  the  incorporators  and  the 

number  of   shares  of  stock  for  which  severally  and  respectively  we 

do  hereby  subscribe,  the  aggregate  of  our  said  subscriptions  being 

,  which  is  the  amount  of  capital  stock  with  which  the 

company  will  begin  business,  are  as  follows : 

Article  VII 

The  duration  of  the  company  shall  be  perpetual. 
In  witness  whereof  we  have  hereunto  set  our  hands  and  seals  this 
day  of  192  . 

"  In  your  case  we  should  divide  the  ownership  of  this  printing  business 
into  two  thousand  parts  or  shares.  We  should  represent  each  share 
with  a  piece  of  paper  called  a  stock  certificate,  with  a  par  value  of  $100 
each.  If  all  these  shares  are  taken  at  par,  and  I  think  they  will  be, 
we  should  have  a  total  of  $200,000,  which  is  the  amount  needed.  If 
you  wish  to  provide  for  future  expansion  we  can  have  our  authoriza- 
tion made  5000  shares ;  issue  only  2000  shares  at  this  time ;  and  issue 
the  remainder  as  it  may  be  needed.     Every  one  who  subscribes  for  one 


274  OUR  ECONOMIC   ORGANIZATION 

or  more  of  these  certificates  has  an  interest  in  the  new  business.  You 
men  who  have  been  operating  the  old  business  as  partners  may  of 
course  exchange  your  ownership  of  the  shop,  machinery  and  materials 
which  you  have  on  hand,  for  shares  of  stock.  You  may  also  purchase 
additional  shares  in  the  same  way  as  anyone  else. 

"You  will  not  have  as  much  to  say  about  the  direction  of  this 
corporation  as  you  have  in  your  partnership,  because,  imless  it  is 
otherwise  specified  in  the  charter,  the  ownership  of  each  share  carries 
with  it  the  right  to  one  vote  at  stockholders'  meetings.  The  business 
policies  of  a  corporation  are  usually  left  in  the  hands  of  a  board  of 
directors  who  are  selected  by  the  stockholders  at  an  annual  meeting. 
Since  each  share  of  stock  gives  one  vote,  those  owning  a  majority  of 
the  shares  will  be  able  to  elect  the  directors  they  choose.  Of  course,  if 
you  men  hold  a  majority  of  the  shares,  you  can  readily  keep  real  con- 
trol of  the  corporation.  Indeed,  since  small  shareholders  are  generally 
careless  about  annual  meetings,  you  men  could  keep  control  by  having 
less  than  a  majority  of  stock  if  the  rest  of  the  stock  were  widely  dis- 
tributed. 

"It  will  not  be  difficult  to  get  even  people  who  do  not  know  you  and 
who  are  imfamiliar  with  the  printing  business  to  subscribe  for  your 
stock.  It  is  known  that  your  business  is  prosperous,  and  a  corporation 
differs  sharply  from  a  partnership  in  one  very  important  respect. 
When  a  corporation  is  formed  it  is  a  'person'  in  the  eyes  of  the  law. 
This  'person'  does  business.  It  is  unlimitedly  liable  to  creditors  for 
debts,  but  the  people  who  have  subscribed  to  its  shares  are  liable  only  to 
the  extent  specified  in  the  corporation  law  of  the  state.  Usually  they 
are  liable  only  to  the  amount  they  subscribe  (single  liability) ;  in  some 
cases,  they  are  liable  for  as  much  more  (double  liability) .  This  means 
that  if  your  new  business  is  unsuccessful  each  stockholder  has  'limited 
liability.'  People  would  more  readily  invest  in  a  corporation,  there- 
fore, than  they  would  join  a  partnership  where  the  lialiility  is  un- 
limited. Then,  too,  a  shareholder  can  get  out  of  a  corporation  by 
selling  his  stock  to  some  one  else.  The  corporation  goes  right  on.  In 
a  partnership,  on  the  other  hand,  the  death  or  withdrawal  of  a  partner 
means  the  end  of  the  partnership. 

"I  ought  to  say  this  too.  When  you  form  a  corporation  you  enter 
into  a  contract,  as  truly  as  you  did  when  you  formed  a  partnership. 
The  character  of  your  partnership  contract  was  set  forth  in  the  partner- 
ship articles.     The  character  of  your  corporation  contract  is  set  forth 


MORE    USUAL   TYPES   OF   BUSINESS   UNITS        275 

in  the  corporation  charter,  which  is  issued  in  terms  of  the  state  corpora- 
tion law,  which  is  carried  out  in  terms  of  the  state  and  federal  con- 
stitutions, all  of  which  are  interpreted  according  to  the  'imwritten 
law'  that  we  call  common  law.  You  can  arrange  to  have  almost 
anything  put  in  your  charter  which  is  not  forbidden  by  these  other 
instruments,  and  anjd^hing  you  do  put  in  your  charter  must  be  carried 
out  in  the  Ught  of  these  other  instruments.  We  must  accordingly  be 
careful  to  put  in  our  charter  just  exactly  the  regulations  and  provisions 
which  we  wish  applicable  to  the  new  business." 

The  partners  decided  to  form  a  corporation  and  directed 
the  lawyer  to  take  charge  of  the  matter  for  them.  As  soon  as 
permission  had  been  received  from  the  Secretary  of  State, 
shares  in  the  new  corporation  were  offered  for  subscription. 
The  original  partners  retained  control  by  subscribing  for  260 
shares  each,  which  they  paid  for  in  property  and  cash.  The 
remaining  960  shares  were  quicldy  taken  by  others.  At  a 
meeting  of  the  shareholders,  the  four  original  partners  and  other 
people  satisfactory  to  them  were  elected  directors.  The  board 
of  directors  proceeded  at  once  to  arrange  for  managing  officials 
and  to  direct  the  affairs  of  the  corporation.  The  business 
continued  to  be  successful.  Every  year  the  gains  were  divided 
among  the  shareholders  in  proportion  to  the  number  of  shares 
each  man  owned.  This  was  expressed  by  saying  that  each 
received  a  certain  per  cent  of  the  par  value  of  his  stock. 
These  "  dividends "  gradually  became  quite  large  so  that 
a  share  of  stock  would  sell  in  the  market  for  much  more 
than  its  par  or  face  value.  The  stock  was  said  to  be  "  above 
par." 

Comparison  of  the  leading  types.  —  The  study  of  this  print- 
ing business  illustrates  the  more  usual  types  of  business  organ- 
ization: the  individual  firm,  the  partnership,  and  the  cor- 
poration. Each  of  these  forms  has  its  own  advantages  and 
disadvantages ;  each  is  better  fitted  than  the  others  to  occupy 
certain  fields. 

The  strength  of  the  individual  firm  lies  in  the  strong  personal 
interest  of  the  owner  and  manager  in  the  firm's  success.     All 


276  OUR   ECONOMIC   ORGANIZATION 

the  gains  are  his ;  all  the  losses  are  his ;  and  he  feels  a  definite 
responsibility  for  both  gains  and  losses.  He  is,  accordingly, 
quick  to  introduce  economies,  to  check  extravagances,  and  to 
"  work  night  and  day  "  for  the  upbuilding  of  the  business. 
It  is  a  form  of  organization  particularly  well  adapted  to  small- 
scale  enterprise,  and  there  we  find  it  predominant. 

When  larger  funds  are  required  for  successful  operation  of  the 
business  than  are  ordinarily  available  in  the  individual  firm, 
either  a  partnership  or  a  corporation  is  likely  to  be  formed. 
The  advantage  of  the  partnership  over  the  individual  firm  lies 
primarily  in  its  larger  resources,  although,  as  we  saw  in  the  case 
of  the  printing  business,  it  may  also  make  possible  a  better 
organization  of  the  managing  staff.  Partners  have  practically  as 
strong  a  personal  interest  as  has  the  individual  owner,  for  they 
also  take  all  the  gains,  bear  all  the  losses,  and  are  responsible 
for  both.  The  outstanding  difficulties  of  the  partnership  are 
these :  the  death  or  bankruptcy  or  withdrawal  of  one  partner 
terminates  the  partnership  and  thus  introduces  an  element  of 
uncertainty  with  respect  to  the  continuity  of  the  business. 
Again,  since  an  agent  may  bind  the  principal,  there  soon  comes 
a  limit  to  the  number  of  partners  which  may  wisely  be  taken 
into  the  business.  "  One  must  know  a  great  deal  concerning 
a  man  before  he  makes  him  a  partner." 

The  corporation  is  the  form  of  business  enterprise  commonly 
used  when  large  funds  are  necessary.  People  regard  stock 
certificates  favorably  as  investments  because  of  the  limited 
liability  of  the  stockholder  and  because  stock  certificates  may 
pass  from  hand  to  hand  without  affecting  the  business  in  the 
slightest.  Also,  as  we  shall  see  latei',  corporations  make  use 
of  a  form  of  security,  called  bonds,  for  those  who  desire  par- 
ticularly safe  investments.  Again,  since  stock  certificates  and 
bonds  may  be  issued  with  any  authorized  par  value  (stock 
certificates  commonly  range  from  .11  to  $100  par  value,  and  are 
usually  either  $50  or  $100;  bonds  commonly  range  from  $50 
to  $1000  par  value  and  are  usually  either  $100,  $500  or  $1000) 
it  is  possible  to  issue  them  in  such  denominations  as  to  tap  the 


MORE   USUAL  TYPES   OF  BUSINESS  UNITS        277 

savings  of  great  numbers  of  small  investors  and  to  enable 
large  investors  to  distribute  their  holdings  among  many  com- 
panies and  thus  "  spread  their  risks."  The  corporation  is, 
accordingly,  a  useful  instrument  in  amassing  funds  for 
business  enterprises.  A  corporation  engaged  in  a  promis- 
ing venture  can  easily  have  stocks  and  bonds  outstanding 
to  the  amount  of  millions  and  even  hundreds  of  millions  of 
dollars. 

There  are  disadvantages  connected  with  the  corporation, 
however.  The  motive  forces  actuating  its  managers  are  not 
as  strong  as  those  which  influence  the  individual  owner  or 
the  partner.  In  the  corporation  the  manager  is  a  "  hired  man  " 
and  all  the  "  bonuses  for  efficient  management  "  in  the  world 
will  neither  conceal  the  fact,  nor  give  him  a  vital  personal 
interest  in  the  affairs  of  the  concern.  Ownership  of  the  business 
has  been  divorced  from  its  management  with  resultant  bad 
effects  on  the  management.  Even  the  board  of  directors  of  a 
corporation  ordinarily  has  less  personal  interest  than  was  the 
case  with  the  printing  establishment  we  have  been  studying. 
In  the  corporation,  accordingly,  routine  and  "  red  tape  "  too 
often  drive  out  initiative  and  efficiency.  Such  a  statement, 
of  course,  is  not  applicable  to  every  case,  and  particularly  it 
is  not  likely  to  be  applicable  to  the  rather  numerous  enter- 
prises which  have  assumed  a  corporate  forpi  as  a  means  of 
increasing  their  resources  although  they  are  really  private 
businesses  or  family  businesses,  the  majority  of  the  stock  being 
in  the  hands  of  a  single  individual  or  in  the  hands  of  a 
family. 

The  chart  (p.  278)  is  designed  to  show  the  manner  in  which 
the  owners  of  the  corporation  have  concentrated  the  power 
of  their  funds  in  the  hands  of  a  small  group  of  men  who  take 
charge  of  the  active  management  of  the  business.  It  is  this 
small  group,  the  directors,  or  an  executive  committee  chosen 
by  them,  or  perhaps  only  a  president  or  manager  whom  they 
select,  that  is  the  real  authority  in  organizing  affairs  within  the 
business  unit. 


278  OUR   ECONOMIC   ORGANIZATION 

Stockholders 

Board  of  Directors 

Executive  Committee 

President 

General  Manager 


Financial     Purchasing        Sales         Production     Personnel     Legal 
Manager        Manager       Manager       Manager        Manager     Adviser 


Credit  Accounting  Salesmen       Advertising 

Man  Department  Manager 

Possible  Organization  Chart  of  a  Corporate  Business 

The  corporate  form's  evils  must  be  corrected.  —  In  provid- 
ing an  organization  which  makes  possible  the  large-scale  busi- 
ness unit,  the  corporation  renders  good  service  to  societj'^, 
but  this  must  not  blind  us  to  the  fact  that  certain  evils 
are  connected  with  it.  Sometimes  our  corporation  laws  are 
rather  lax  and  corporations  are  formed  primarily  to  "  fleece  " 
investors ;  sometimes  the  so-called  minority  stockholders, 
being  outvoted  by  the  majority  holders,  find  themselves 
treated  rather  badly  and  get  but  cold  comfort  from  the  fact 
that  they  can  escape  from  the  situation  by  selling  their  stock ; 
sometimes  boards  of  directors  and  managers  abuse  their  trust 
and  make  money  out  of  dealing  in  the  corporate  securities, 
as  for  example  by  spreading  false  rumors  depreciating  the 
company's  prospects.  This  tends  to  cause  the  stock  to  fall  in 
price  in  the  market.  The  manipulators  then  buy  quantities 
of  it,  let  the  real  truth  come  out  and  sell  the  stock  for  a 
gain  on  the  resultant  rise  of  price.  Sometimes  a  group  gets 
control  in  one  corporation  and  deliberately  wrecks  it  in  order 
to  build  up  some  other  corporation  with  which  they  are  more 
profitably  associated.     There  are  here  some  very  real  problems 


MORE   USUAL   TYPES   OF   BUSINESS  UNITS        279 

which  are  as  yet  far  from  sokition.  Schemes  of  Hmited 
voting,  by  which  holders  of  more  than  a  certain  number  of 
shares  of  stock  do  not  get  one  vote  for  each  of  these  addi- 
tional shares ;  plans  for  proportional  representation,  by  which 
the  minority  may  always  be  reasonably  certain  of  being  at  least 
represented  on  the  board  of  directors ;  "  blue  sky  "  laws,  per- 
haps so  called  because  they  are  designed  to  protect  investors 
from  purchasing  shares  in  corporations  which  have  no  real 
assets  but  air  and  sky ;  laws  forbidding  more  than  a  certain 
percentage  of  stock  to  be  held  under  one  control  —  these  are 
illustrations  of  the  ways  in  which  some  of  our  states  are  trying 
to  improve  the  corporation. 

One  of  the  worst  evils  of  the  corporation  is  what  is  sometimes 
called  "  absentee  capitalism."  A  corporation  is  a  very  im- 
personal thing.  It  is  very  easy  for  a  shareholder  to  be  quite 
indifferent  concerning  what  the  corporation  does,  so  long  as 
he  gets  dividends.  The  corporation  may  engage  in  practices 
toward  its  customers,  or  toward  its  workers,  or  toward  the 
public,  which  may  be  quite  improper  and  of  which  the  stock- 
holder would  disapprove  if  they  were  called  to  his  attention. 
The  chances  are,  however,  that  he  will  never  hear  of  them.  Of 
course  he  ought  to  hear  of  them ;  of  course  he  is  really  respon- 
sible for  them ;  but  the  responsibility  sits  lightly  upon  him, 
and  this  frequently  leads  to  an  attitude  of  indifference  toward 
all  sorts  of  improper  business  practices.  This  situation  is  to 
no  small  extent  responsible  for  the  width  of  the  gulf  between 
employers  and  employees  to-day.  The  ultimate  employer  in  a 
corporation  is  the  stockholder,  but  he  practically  never  has 
any  contact  with  the  worker.  This  tends  to  make  still  more 
impersonal  the  handling  of  labor  matters  in  large-scale  industry  ; 
tends  to  give  the  worker  more  and  more  a  sense  of  being  a  mere 
cog  in  a  machine. 

There  is,  accordingly,  in  the  corporation  to-day  great  con- 
centration of  power  in  the  form  of  massed  funds  accompanied 
by  small  and  scattered  responsibility.  The  managing  officers 
do  not  feel  much  responsibility  to  society ;    they  are  working 


280  OUR  ECONOMIC   ORGANIZATION 

in  an  impersonal  way  for  the  shareholders.  The  shareholders 
have  a  limited  financial  liability  and  tend  to  take  little  interest 
in  what  the  firm  does,  provided  "it  pays."  Says  Carver: 
"  The  difference  between  a  man  and  a  monster  is  precisely 
that :  the  monster  feels  a  sense  of  power  and  does  not  feel  a 
sense  of  responsibility."  ^  We  must  do  something  to  restore  to 
the  corporation  and  to  the  shareholders  a  sense  of  responsibility 
for  their  acts  ;  something  to  make  certain  beyond  peradventure 
that  it  will  not  become  a  monster  in  industrial  society. 

The  corporation's  part  in  our  business  life.  —  There  was 
a  time  when  almost  all  businesses  were  on  such  a  scale  that 
they  could  be  conducted  by  individuals  or  by  partnerships. 
With  the  incoming  of  machine  industry,  however,  with  its 
large  overhead  costs,  its  expensive  processes,  and  its  huge 
bills  for  wages  and  materials,  the  corporation  came  more  and 
more  to  be  used.  In  the  United  States  the  great  development 
of  corporations  has  occurred  in  the  last  seventy-five  years 
and  particularly  in  the  last  generation.  A  careful  student  ^ 
estimates  that  over  92  per  cent  of  the  mineral  output  of  the 
country  is  produced  by  corporation-owned  mines ;  over  77 
per  cent  of  our  manufactured  goods  are  made  by  corporations ; 
practically  all  of  our  transportation  and  communication  by 
water,  rail,  and  wire  is  conducted  by  corporations ;  and  in 
commercial  enterprises  the  corporation  is  playing  a  more  and 
more  important  part.  He  estimates  that  39  per  cent  of  the 
total  products  of  American  industry  were  turned  out  by  cor- 
porations in  1899  and  over  44  per  cent  in  1909.  Perhaps  to-day 
it  is  50  per  cent  of  the  total.  That  it  is  not  much  greater  than 
50  per  cent  is  due  to  the  fact  that  in  agriculture  the  individual 
entrepreneur  still  largely  holds  the  field. 

Notice  in  the  following  table  ^  how  the  number  of  corporations 
in  manufactures  has  increased,  but  more  especially  how  the 
average  number  of  men  employed  by  corporations  compares 

'  T.  N.  Carver,  Prinriplea  of  Political  Economy,  pp.  171-172. 

2  W.  I.  King,  The  Wealth  and  Income  of  the  People  of  the  United  States,  pp.  208-211. 

'  Adapted  from  The  Abstract  of  the  Census  of  Manufactures,  1914,  pp.  374,  385. 


MORE   USUAL  TYPES   OF  BUSINESS  UNITS        281 


with  the  average  number  employed  by  individually  owned 
businesses.  Notice  carefully,  also,  how  large  comparatively  is 
the  value  of  products  produced  by  corporations. 


Number 

Wage-earners 

Value 

3F  Products 

Character 

OF 

Ownership 

Establish- 
ments 

Percent 
Distribu- 
tion 

Average 
Number 

Average 
per  Es- 
tablish- 
ment 

Amount 

Average 
per  Estab- 
lishment 

Per  Cent 
Distribu- 
tion 

All  classes : 
1914 .     .     . 
1909 .     .     . 
1904 .     .     . 

275.791 
268.491 
216.180 

100.0 
100.0 
100.0 

7.036,337 
6.615.046 
5,468,383 

25.5 
25.0 
25.0 

S24.246.434.724 
20,672,051,870 
14,793,902,563 

$  87,915 
76,993 
68,433 

100.0 
100.0 
100.0 

1914.     .     . 

1909 .     .     . 

1904 .     .     . 
Corporations : 

1914 .     .     . 

1909 .     .     . 

1904 .     .     . 
All  others ; 

1914.     .     . 

1909 .     .     . 

1904 .     .     . 

142.436 
140.605 
113,946 

78,151 
69.501 
51.097 

55.204 
58.385 
51,137 

51.6 

52.4 
.52.7 

28.3 
25.9 
23.6 

20.0 
21.7 
23.7 

707,568 
804,883 
755,923 

5,649.646 
5.002.393 
3,862,698 

679,123 
807.770 
849.762 

5.0 
6.0 
7.0 

72.0 
72.0 
76.0 

12.0 
18.0 
21.0 

1,925,518,298 
2,042,061,500 
1,702,830,624 

20,181,279,071 
16,341,116,634 
10,904,069,307 

2,139,637,355 
2,288,873,736 
2,187,002,632 

13,518 
14,523 
14,944 

258,174 
235,121 
213,399 

38,835 
39,203 
42,768 

7.9 

9.9 

11.5 

83.2 
79.0 
73.7 

8.8 
11.1 
14.8 

The  Place  of  the  Corporate  Form  in  Manufactures 

Shares  of  stock  and  bonds.  —  It  is  worth  while  to  get  a  httle 
better  understanding  of  shares  of  stock  and  bonds.  These 
instruments  are  sometimes  spoken  of  as  corporate  securities. 
We  can  take  here  only  a  bird's-eye  view,  for  these  securities  are 
put  out  in  a  great  many  varieties  in  order  to  appeal  to  all 
possible  classes  of  investors.  In  broad  outhne,  however,  the 
matter  is  simple  enough ;  shares  of  stock  represent  ownership 
in  the  business,  bonds  represent  the  loan  of  money  to  the 
business. 

Kinds  of  Stocks 

r  common 
Stocks  \  (  ordinary  or  non-cumulative 

[  preferred  j 

[  cumulative 

The  stock  which  we  saw  issued  in  our  account  of  the  printing 
estabUshment  was  "  common  stock."     Sometimes  "  preferred 


282 


OUR   ECONOMIC   ORGANIZATION 


MORE   USUAL   TYPES   OF   BUSINESS  UNITS        283 


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284  OUR   ECONOMIC   ORGANIZATION 

stock  "  is  used.  It  may  be  "  preferred  "  (have  prior  claim)  as 
compared  with  the  common  stock,  with  respect  to  the  distribu- 
tion of  profits  or  with  respect  to  the  division  of  assets  when  the 
corporation  goes  out  of  business,  or  with  respect  to  both.  On 
the  other  hand,  the  extent  of  its  participation  in  profits  is 
usually  limited  to  a  certain  per  cent,  whereas  the  common 
stockholder  is  not  limited;  he  gets  all  that  is  left,  be  it  large 
or  small,  and  is  therefore  sometimes  called  the  residual  claimant. 
Thus  if  one  owns  a  share  of  7  per  cent  preferred  stock,  he  is 
entitled  to  a  dividend  of  seven  per  cent  on  the  par  value  of  his 
stock  before  any  dividends  are  declared  on  the  common  stock. 
The  common  stockholders  get  what  is  left.  Sometimes  it  is 
nothing ;  but  corporations  have  been  known  to  pay  20  per  cent, 
50  per  cent,  and  occasionally  much  more  to  common  stock- 
holders. Ordinary  preferred  stock  gets  its  dividends  only  in 
those  years  in  which  profits  make  it  possible.  The  rights  which 
the  holder  of  cumulative  preferred  stock  has  to  dividends 
cumulate  or  heap  up  year  after  year,  in  case  dividends  are  not 
paid  because  profits  are  small.  Thus  if  a  corporation  has  7  per 
cent  cumulative  preferred  stock  which  has  not  paid  dividends 
for  five  years,  the  owner  of  such  stock  will  ordinarily  be  entitled 
to  35  per  cent  dividends  before  any  dividend  can  be  declared 
on  the  common  stock. 

It  will  be  easier  to  understand  bonds  if  you  think  of  them  as 
simply  a  kind  of  promissory  note.  They  are  the  promises  of 
the  corporation  to  pay  back  after  a  certain  period  of  years 
(generally  a  rather  long  period)  money  which  has  been  loaned 
to  the  corporation  by  the  bondholders ;  they  promise  also  that 
a  certain  rate  of  interest  will  be  paid  the  lender  meanwhile. 
The  claim  of  the  bondholder  on  earnings  and  on  property  in 
case  of  a  dissolution  of  a  corporation  is  prior  to  that  of  the 
stockholders.  Bonds  are  thus  "  safer  "  for  the  investor  than 
are  stocks.  On  the  other  hand,  their  rate  of  interest  is 
usually  lower  than  even  the  fixed  rate  of  the  preferred 
stock.  A  mere  list  of  the  various  kinds  of  bonds  that  it  has 
been  found  worth  while  to  issue  would  take  several  pages. 


MORE   USUAL   TYPES   OF  BUSINESS   UNITS        285 


The    following 
explanatory : 


classification   will    probably    be    found    self- 


KiNDS  OF  Bonds 


Classified  according  to 
kind  of  security 


["  Mortgage  on  real  property 
•i  Mortgage  on  other  securities 
[  Mere  prior  claim  on  earnings 


Bonds  < 


Classified  according  to  f  Registered 
evidence  of  owner-    j 
ship  and  transfer        [  Unregistered  (coupon) 


Bridge  bonds 
Construction  bonds 
Car  trust  bonds 
Equipment  bonds 
Extension  bonds 
Ferry  bonds 
Terminal  bonds 
Improvement  bonds 
Etc. 


Classified  according  to 
purpose  of  issue 


Classified  according  to 
issuing  concern 


Government  —  state  and  national 
Municipal  and  county 

Railroad,  express,  and  steamship  companies 
Traction  companies 

Gas,  electric  light,  and  water  companies 
Bank  and  trust  companies 
Investment  companies 
Industrials 
Mining  companies 
l_  Miscellaneous 

Minor  types  of  business  organization.  —  The  three  types  of 
business  organization  which  we  have  been  considering  are  the 
ones  which  are  most  distinct  and  most  clearly  defined.  There 
are,  however,  many  other  types,  and  all  types  shade  off  into 
one  another.     A  fuller  list,  not  a  complete  one,  would  run  as 

follows : 

The  individual  firm 
The  agency 

The  general  partnership 
The  limited  partnership 
The  partnersliip  association 
The  joint  stock  company 


"  See  F.  A.  Cleveland,  Classification  and  Description  of  Bonds,  Annals  of  the  American 
Academy  of  Political  and  Social  Science,  XXX  (1917),  pp.  400-111. 


286  OUR   ECONOMIC   ORGANIZATION 

The  corporation 

corporations  for  general  business  purposes 

corporations  for  public  service 

corporations  for  financial  purposes 
The  voting  trust 

The  combination  (treated  in  Study  XVII) 
The  cooperative  concern 
State  and  municipal  enterprise 

It  is  easy  to  see  the  circumstances  under  which  these  types 
are  useful.  Sometimes  in  a  business  enterprise  the  need  of 
the  management  is  not  the  securing  of  additional  advice  or  of 
additional  funds  but  of  getting  an  increased  amount  of  work 
done.  In  such  a  case  the  agency  is  likely  to  be  used.  The 
original  concern  (which  may  be  any  type  of  organization) 
simply  employs  other  persons  who  have  nothing  to  say  about 
the  business ;  who  furnish  no  money ;  who  merely  represent 
the  principal  and  bind  him  within  the  proper  scope  of  thieir 
agency.  Agency  viewed  in  its  functional  aspect,  therefore, 
may  properly  be  called  a  multiplying  device ;  it  multiplies  the 
number  of  persons  who  can  carry  on  some  or  all  of  the  activities 
of  the  original  firm. 

Sometimes  the  law  of  a  state  provides  for  the  so-called  limited 
partnership,  the  essential  feature  of  which  is  that  some  of  the 
partners  have  general  or  unlimited  liability  while  others  have 
limited  liabihty.  Speaking  generally,  the  other  features  of  the 
limited  partnership  are  not  different  from  those  of  the  general 
partnership  which  we  have  already  described. 

The  partnership  association  carries  the  same  principle 
further.  It  also  can  exist  only  as  a  result  of  a  permissive  law. 
All  its  members  may  have  limited  liability.  Furthermore,  a 
system  of  managing  officers  may  be  set  up  and  ownership  in 
the  business  may  even  be  transferred  from  person  to  person 
without  terminating  the  life  of  the  association.  Details  will 
of  course  vary  according  to  the  details  of  the  law  in  different 
states.     This  type  of  organization  exists  in  but  few  states. 

The  joint  stock  company  is  something  of  a  cross  between  the 


MORE   USUAL  TYPES   OF   BUSINESS   UNITS        287 

partnership  and  the  corporation.  In  form  of  organization  it  is 
like  the  corporation,  shares  being  issued  and  sold  to  a  wide 
number  of  owners.  These  shares  are  transferable  without  the 
consent  of  other  owners.  The  management  is  also  like  the 
corporation  in  that  it  is  usually  delegated  to  a  board  of  directors. 
Liabihty,  however,  in  the  joint  stock  company  is  ordinarily 
unlimited  liability.  However,  details  vary  according  to  the 
details  of  the  permissive  law. 

Sometimes  the  voting  stock  of  a  corporation  or  at  least  a 
majority  of  it  is  placed  in  the  hands  of  a  few  responsible  men  of 
high  standing  known  as  "  trustees."  These  trustees  are  given 
instructions  to  use  this  voting  power  in  a  certain  manner  and 
for  certain  purposes.  This  device  is  sometimes  used  when  a 
corporation  is  being  formed  in  order  to  guarantee  to  minority 
stockholders  that  a  certain  policy  will  be  followed.  It  is  also 
used  when  a  company  is  in  financial  straits  and  its  creditors  are 
able  to  force  giving  the  management  over  to  well-known, 
responsible  men  who  will  carry  out  a  certain  policy.  It  is 
known  as  the  voting  trust. 

It  is  not  easy  to  differentiate  the  cooperative  concern  from 
other  forms  of  business  enterprise.  In  its  pure  form,  the 
cooperative  company  represents  group  action  by  workers.  In 
"  producer's  cooperation "  the  workers  contribute  the  capi- 
tal, appoint  a  manager,  and  become  themselves  the  "  profit 
takers "  of  the  business.  In  "  consumer's  cooperation " 
capital  is  generally  furnished  by  a  consuming  group  who  get 
their  "  dividends  "  in  the  form  of  a  periodical  refund  on  pur- 
chases made,  or  in  the  form  of  lower  prices  on  goods  purchased. 
Some  of  these  cooperative  concerns  have  taken  out  charters 
and  become  corporations ;  some  have  themselves  become  great 
employers  of  labor  in  the  usual  "  capitalistic  "  way.  In  the 
United  States  to-day  the  largest  field  of  cooperative  enterprise 
is  not  among  workers,  but  among  the  farmers  where  various 
cooperative  schemes  of  marketing,  of  manufacture  of  dairy 
products,  of  insurance,  etc.,  are  rather  widely  used.  Perhaps  it 
ought  to  be  added  that  some  persons  call  a  state  or  municipal 


288  OUR  ECONOMIC   ORGANIZATION 

enterprise,  such  as  a  municipally  owned  and  operated  water 
works  system,  a  cooperative  enterprise. 

Sometimes  the  state  or  the  municipality  engages  in  enter- 
prise itself.  There  are,  for  example,  water  supply  systems, 
lighting  systems,  street  railway  systems,  and  in  foreign  coun- 
tries, railroad,  telegraph,  and  telephone  systems,  handled  in 
this  way.  One  group  of  people  —  the  socialists  —  think  it 
would  be  wise  to  have  practically  all  our  productive  enterprises 
so  handled.  The  usual  way  in  which  these  state  and  municipal 
enterprises  have  been  conducted  in  the  United  States  is  this : 
bonds  have  been  issued  to  get  the  money  to  build  the  original 
plant,  and  the  bondholders  are  of  course  paid  interest  on  this 
money  they  have  loaned  to  the  government ;  this  interest  and 
the  operating  expenses  are  met  out  of  the  income  of  the  business 
and,  if  necessary,  out  of  taxes.  The  management  of  the 
business  is  in  essence  not  far  different  from  the  management 
of  a  corporation.  It  is  not  as  efficient  probably,  for  too  fre- 
quently men  are  given  managing  positions  because  they  are 
good  politicians  rather  than  because  they  are  good  business 
managers.  It  is  a  pity  that  we  have  not  yet  learned,  in  America, 
to  serve  society  as  zealously  and  as  efficiently  as  we  serve 
ourselves. 

All  these  types  of  business  organization  grow  out  of  various 
needs  of  industrial  society.  They  are  simply  devices  for  adapt- 
ing and  applying  our  productive  resources  to  our  needs.  They 
are  ways  of  assembling  into  a  productive  organization,  and 
of  managing  after  such  assembly,  land,  labor,  capital,  and 
acquired  knowledge. 

PROBLEMS 

1.  Cite  instances  of  individual  firms  in  your  town ;  of  partnerships ; 
of  corporations. 

2.  If  you  were  a  business  man  and  wished  to  borrow  money  from 
a  bank,  what  information  would  the  bank  require  before  making  the 
loan?  If  necessary,  consult  a  local  bank  to  get  the  answer  to  this 
question.     (See  p.  360.) 


MORE   USUAL   TYPES   OF   BUSINESS   UNITS        289 

3.  Draw  up  a  list  of  the  reasons  which  might  induce  an  individual 
organizer  to  take  a  partner. 

4.  Set  down  the  reasons  which  an  individual  organizer  might  have 
for  hesitating  to  form  a  partnersliip. 

5.  Why  should  the  man  mentioned  in  the  text  set  aside  a  sum  to 
cover  depreciation  in  figuring  what  his  profits  were  ?  Why  should  he 
set  aside  a  payment  for  his  own  labor  ? 

6.  Suppose  a  man  of  very  ordinary  means  formed  a  partnership 
with  a  very  wealthy  person  and  that  the  partnership  failed  with  a  very 
large  indebtedness.  Would  the  wealthy  person  be  likely  to  be  held 
for  more  of  the  debts  of  the  firm  than  the  man  of  ordinary  means  ? 

7.  Why  might  a  banker  be  more  willing  to  loan  to  a  partnership 
than  to  an  individual  ? 

8.  State  in  general  the  steps  which  are  necessary  to  the  formation 
of  a  corporation.  Do  people  need  to  notify  the  state  authorities  when 
they  form  an  ordinary  general  partnership?  When  they  form  a 
limited  partnership? 

9.  Distinguish  between  a  share  in  a  corporation  and  a  stock 
certificate.  Distinguish  between  authorized  capital  stock  and  out- 
standing capital  stock. 

10.  If  you  owned  the  majority  of  the  stock  of  a  corporation,  could 
you  direct  its  business  policies?  If  you  could,  would  you  do  so  by 
voting  on  every  action  wliich  was  considered  by  the  corporation? 

11.  Is  continuity  of  life  more  certain  in  the  individual  firm,  the  part- 
nership, or  the  corporation  ? 

12.  "A  corporation  is  a  legal  individual."  Explain.  Is  this  also 
true  of  a  partnership  ? 

13.  How  does  it  come  that  a  lawyer  was  consulted  by  the  persons 
who  contemplated  forming  a  corporation  ?  Why  not  a  banker  ?  Do 
you  think  that  a  banker  might  have  been  consulted  under  certain 
circumstances?  On  what  matters  would  a  banker's  advice  have  been 
worth  while  ? 

14.  Draw  up  in  parallel  columns  a  comparison  of  the  chief  char- 
acteristics of  the  individual  fii'm,  the  partnership,  and  the  cor- 
poration. 

15.  Suppose  that  a  friend  of  yours  who  was  forming  a  large  corpora- 
tion wished  you  to  subscribe  for  a  few  shares  of  stock.     It  seemed  a 


290  OUR  ECONOMIC   ORGANIZATION 

good  investment,  but  you  were  afraid  that  the  larger  stockholders 
might  mismanage  the  company's  affairs.  Could  you  propose  any 
form  of  organization  which  might  protect  your  small  interest  ? 

16.  Draw  up  a  list  of  the  reasons  why  larger  funds  can  generally 
be  brought  together  by  a  corporation  than  by  a  partnership.  Do 
these  large  funds  in  the  hands  of  a  corporation  enable  it  to  exercise 
control  over  a  large  amount  of  social  resources? 

17.  "  In  the  corporation,  ownership  of  the  business  has  been  divorced 
from  its  management  with  resultant  bad  effects  on  the  management." 
In  what  sense  are  the  two  divorced  ?  What  are  some  of  the  resultant 
bad  effects  on  the  management  ? 

18.  "The  corporation  is  an  impersonal  thing."  Give  as  many 
reasons  as  you  can  for  calling  the  corporation  impersonal. 

19.  "We  must  do  something  to  restore  to  the  corporation  and  to  the 
shareholders  a  sense  of  responsibiHty  for  their  acts."  Why  should  we 
do  this?    Why  do  they  lack  a  sense  of  responsibility? 

20.  Why  was  it  that  the  corporation  did  not  become  a  common  form 
of  business  organization  until  the  last  75  years?  What  were  the  usual 
forms  of  organization  prior  to  the  coming  in  of  the  corporation  ?  Have 
these  forms  disappeared  ? 

21.  Are  larger  dividends  paid  upon  common  or  upon  preferred 
stock?  Which  would  you  prefer  to  own,  a  share  of  common  or  of  pre- 
ferred stock  in  the  same  company? 

22.  A  Chicago  broker  in  offering  stock  to  a  prospective  customer 
recently  said,  "This  stock  carries  25%  '  back  dividends.'"  Explain 
what  he  meant. 

23.  The  stock  of  a  certain  corporation  has  a  par  value  of  $100.  The 
preferred  is  quoted  in  market  reports  at  QSj,  the  common  at  110.  Ex- 
plain. 

24.  "Stock  certificates  are  evidences  of  ownership;  bonds  are 
evidences  of  indebtedness."  What  does  this  mean?  What  does  it 
imply  with  respect  to  the  management  of  a  corporation  ? 

25.  A  corporation  has  outstanding  $1,000,000  of  5%  mortgage 
bonds,  $10,000,000  of  7%  preferred  stock,  and  $10,000,000  of  common 
stock.  Gross  annual  earnings  arc  $11,950,000;  total  expenses  for 
the  year  are  $9,900,000;  depreciation  amounts  to  10%  on  a  valuation 
of  $11,000,000.     What  is  the  amount  available  for  distribution  among 


MORE   USUAL   TYPES   OF  BUSINESS   UNITS        291 

security  owners  and  how  will  this  amount  be  distributed  among  the 
holders  of  the  different  securities? 

26.  What  is  meant  by  saying  that  bonds  are  "safer"  than  stocks? 
Could  the  stocks  of  one  company  be  "safer"  than  the  bonds  of  an- 
other ? 

27.  Explain  why  an  agency  may  be  called  a  multiplying  device. 

28.  In  what  ways  is  the  management  of  a  municipal  enterprise  like 
the  management  of  an  ordinary  corporation  ?  Are  there  reasons  why 
it  is  likely  to  be  better?    Are  there  reasons  why  it  is  likely  to  be  worse? 

29.  Draw  up  an  outline  of  the  main  points  of  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  Selections  126,  127,  133, 
134,  137,  and  138. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life: 
Series  A,  Lesson  A-21,  Moulton,  "  Borrowmg  Capital  for  Modern 
Business." 
By  making  use  of  any  standard  text  in  commercial  law  one  or  more 
additional  lessons  on  the  forms  of  business  organization,  especially  the 
partnership,  the  corporation,  and  agency,  may  readily  be  inserted. 


STUDY  XVII 

CONCENTRATED  CONTROL,   COMBINATIONS,  AND 
MONOPOLIES 

PURPOSES  OF  THIS  STUDY : 

1.  To  study  the  forms  of  business  organization  designed  to  extend  and 

concentrate  control. 

2.  To  see  some  consequences  of  concentration,  and  society's  action  in 

the  case. 

3.  To  get  an  idea  of  the  place  of  monopoly  in  our  industrial  society. 

The  corporation  as  a  means  of  concentrating  control.  —  In 

these  days  of  large-scale  enterprise  business  men  frequently 
find  it  desirable  to  concentrate  under  one  control  power  over 
great  masses  of  our  social  resources.  Sometimes  they  find  it 
desirable  in  order  to  bring  about  economics  of  production ; 
some  of  the  cases  of  integration  of  industry  discussed  in  Study 
XV  were  for  this  purpose.  Sometimes  they  wish  it  in  order 
to  control  the  market  more  effectively,  even  to  the  extent  of 
getting  monopoly  control ;  many  of  our  trusts  were  formed  with 
this  motive.  Sometimes  they  seek  ways  of  reducing  the  risks 
of  modern  specialized  business ;  nearly  all  our  modern  com- 
binations have  been  thus  influenced.  From  society's  point  of 
view  such  concentration  of  control  has  sometimes  been  bene- 
ficial and  sometimes  it  has  been  quite  harmful.  In  this  chapter 
we  shall  study  some  of  the  forms  of  business  enterprise  which  are 
used  in  bringing  about  this  concentration.  As  one  phase  of  the 
subject  we  shall  deal  with  trusts.  We  must  keep  our  minds 
clear  on  one  point,  however ;  concentration  of  control  does  not 
necessarily  mean  monopoly  and  trusts.  Even  if  there  were 
not  a  single  trust  to-day,  much  of  the  material  in  this  chapter 
would  still  need  to  be  presented. 

292 


CONCENTRATED   CONTROL  293 

The  corporation  form  of  business  organization,  though  it  is 
often  used  for  operating  small  businesses,  is  one  of  our  most 
important  means  of  concentrating  control  over  large  masses  of 
social  resources.  It  is  not  merely  that  the  corporation  may 
itself  be  very  large ;  power  over  a  large  corporation  may  be 
readily  concentrated  in  a  few  hands.  For  example,  a  small 
compact  minority  can  control  a  corporation  when  the  holdings 
of  stock  are  widely  scattered  and  when  affairs  are  going  to  the 
satisfaction  of  the  stockholders.  At  first  thought  this  seems 
strange ;  but  imagine  yourself  as  the  owner  of  a  few  shares  of 
some  great  successful  corporation  such  as  the  Standard  Oil 
Company.  You  would  know  very  little  about  the  affairs  of 
the  company ;  could  have  little  judgment  concerning  what 
policies  would  be  wise.  You  would  accordingly  either  pay  no 
attention  at  all  to  the  annual  meeting  of  the  stockholders, 
which  would  be  held  at  the  offices  of  the  company  located  per- 
haps thousands  of  miles  from  your  home,  or  upon  mere  request 
you  would  give  the  people  already  in  power  your  proxy  (the 
right  to  vote  your  stock  at  the  meeting).  How  ridiculously 
easy  it  may  be  for  a  small  compact  minority  to  control  a  cor- 
poration is  seen  from  the  following  case.  A  certain  corporation 
had  fourteen  thousand  stockholders.  Each  of  these  was  sent 
a  notice  of  the  annual  meeting  but  only  twelve  attended.  Of 
these  twelve,  only  one  asked  to  see  the  year's  financial  state- 
ment, and  it  developed  later  that  he  wanted  to  see  it,  because 
he  hoped  that  it  would  assist  him  in  drawing  up  a  similar 
statement  for  the  church  of  which  he  was  a  minister ! 

The  charter  of  a  corporation  and  the  provisions  governing 
the  issue  of  its  securities  may  be  so  drawn  as  to  bring  about 
great  concentration  of  control  within  the  corporation.  One 
way  is  to  issue  very  little  common  stock,  and  that  little  to  very 
few  persons,  giving  the  common  stock,  however,  the  power  to 
elect  the  board  of  directors,  or  at  least  the  power  to  elect  a  ma- 
jority of  the  board  of  directors.  When  so  small  an  amount  of 
common  stock  is  issued,  the  money  which  the  corporation  needs, 
even  though  a  large  amount,  can  be  secured  either  by  issuing 


294  OUR  ECONOMIC   ORGANIZATION 

and  selling  large  quantities  of  preferred  stock  or  by  issuing 
and  selling  bonds  or  by  both  methods.  In  any  case  a  corpora- 
tion thus  organized  will  be  controlled  by  the  common  stock- 
holders, for  the  preferred  stockholders  will  have  at  best  less 
voting  power  than  the  common  stockholders,  and  bondholders 
ordinarily  have  no  voting  power.  Power  can  readily  be  con- 
centrated in  a  few  hands  when  the  greater  part  of  the  securities 
outstanding  are  preferred  stocks  and  bonds,  and  only  the 
common  stock  has  voting  power ;  for  as  we  have  seen,  a  mi- 
nority of  the  voting  stockholders  may  he  able  to  control. 

Another  form  of  concentrated  control  is  seen  in  what  is  called 
control  hy  a  dominating  spirit.  A  few  years  ago  Mr.  E.  H. 
Harriman  was  interested  in  building  up  and  combining  many 
of  the  railroads  of  the  West.  The  stock  of  these  roads  was  held 
by  persons  scattered  all  over  the  country.  Most  of  them  knew 
very  little  about  railroading,  but  they  had  a  great  deal  of 
confidence  in  Mr.  Harriman  and  felt  that  if  the  whole  manage- 
ment were  left  in  his  hands  it  would  be  successfully  conducted. 
They  accordingly  readily  gave  him  their  proxies  to  such  an 
extent  that  he  had  freedom  to  do  almost  as  he  pleased.  In  form 
these  stockholders  controlled  the  management  of  the  companies 
concerned ;  in  actual  effect  a  different  form  of  organization 
came  into  being  —  that  of  a  dominating  spirit.  When  several 
of  these  dominating  spirits  act  in  accord  with  one  another,  they 
are  able  to  wield  tremendous  power. 

The  form  or  kind  of  corporation  known  as  a  holding  com- 
pany may  be  used  to  bring  about  great  concentration  of  power 
in  relatively  few  hands.  As  we  know  a  corporation  is  a  person 
as  the  law  views  the  matter.  This  person,  if  the  state  in  which 
it  is  incorporated  has  permitted  that  power  in  its  charter,  may 
invest  in  the  securities  of  other  corporations,  just  as  you  or  I 
could.  If  it  buys  over  50  per  cent  of  the  voting  stock  of 
another  corporation,  it  can  certainly  control  this  second  cor- 
poration and  can  probably  control  through  the  ownership  of 
much  less.  A  holding  company  is  a  corporation  organized  for 
the  purpose  of  holding  or  owning  shares  of  other  corporations. 


CONCENTRATED  CONTROL 


295 


How  it  works  may  be  seen  from  the  accompanying  diagram  of 
the  Atlantic  Coast  Line  Company  (a  holding  corporation)  and 
the  corporations  it  controlled.  It  secured  ownership  of  a  little 
more  than  50  per  cent  of  the  Atlantic  Coast  Line  Railroad 


ATLANTilC  COAST  LINE  CO. 
STOCK  $10,500,000 


GEORGIA  R.  R. 
LESSEE  ORbANIZATlON 


GEOR(ilA 


LOUISVILLE   RY 

88  ;„ 


'OLIS 
CO. 


R.  R. 


The  Atlantic  Coast  Line  Holding  Company  ' 

The  persons  who  control  the  holding  company  can  of  course  control  the  votes 
of  the  stock  which  it  holds. 

Company,  which  owned  51  per  cent  of  the  Louisville  and  Nash- 
ville Railroad  Company,  and  these  two,  together  with  the 
Southern  Railroad  Company,  controlled  two  other  lines.  An 
ownership  of  a  little  more  than  $5,000,000  worth  of  capital 
stock  in  the  holding  company  thus  served  to  give  control  of 
a  railway  system  over  11,000  miles  in  extent,  with  a  capitaliza- 
tion of  nearly  three  quarters  of  a  billion  dollars. 

'  Adapted  from  Interstate  Commerce  Commission,  Special  Report  No.  1,  Intercorparale 
Relation  of  Railways  in  the  United  Stales,  as  of  June  SO,  1906,  pp.  15-16. 


296  OUR   ECONOMIC   ORGANIZATION 

This  form  of  business  organization  as  a  means  of  controlling 
large  amounts  of  social  resources  is  very  common.  In  a  form 
somewhat  like  the  one  we  have  described  above  it  was  used  by 
the  American  Tobacco  Company.  This  company  had  very 
little  common  stock  and  raised  its  great  capital  by  large  issues 
of  preferred  stock  and  bonds.  The  common  stockholders, 
however,  had  control  because  of  their  voting  power.  In  this 
case  ten  large  stockholders  controlled  not  less  than  86  sub- 
sidiary companies  operating  in  the  tobacco  business  in  various 
parts  of  the  world.  The  total  capitalization  of  these  companies 
was  nearly  a  half  billion  dollars. 

It  is,  of  course,  only  a  step  from  the  holding  company  which 
has  a  mere  "  controlling  interest  "  in  "its  subsidiary  com- 
panies "  to  the  great  giant  corporation  specifically  organized 
to  purchase  outright,  and  thus  "  consolidate  "  a  group  of  former 
competitors. 

Another  method  of  concentrating  control  through  the  cor- 
porate form  of  business  organization  is  by  interlocking  direc- 
torates. This  type  is  not  difficult  to  understand.  Two  firms, 
for  example,  may  be  competing  and  each  finds  that  the  other 
is  continually  doing  something  to  injure  it.  The  directors  of 
each  decide  that  although  they  do  not  wish  actually  to  combine, 
much  can  be  gained  if  they  act  more  harmoniously.  There- 
fore each  company  elects  to  its  own  board  of  directors  one  or 
two  men  who  are  on  the  board  of  directors  of  the  rival  company. 
In  this  way  each  concern  has  some  voice  in  directing  the  policy 
of  the  other  and  a  management  is  effected  in  which  each  does 
the  other  less  injury.  Sometimes  interlocking  directorates 
extend  not  only  between  two  companies  but  among  a  great 
number. 

A  report  of  a  committee  of  one  of  our  Houses  of  Congress 
made  in  1913  stated  that  three  of  the  largest  banks  in  New 
York,  Morgan  &  Company,  the  First  National,  and  the  National 
City  Bank,  through  stockholding,  voting  trusts,  interlocking 
directorates,  and  similar  relations,  exercised  an  important 
influence  in   controlling  great  masses  of  capital  invested  in 


CONCENTRATED   CONTROL  297 

banking,  railroads,  producing  and  trading  companies,  and  public 
utility  corporations.  A  summary  of  the  directorships  held  by 
the  members  of  this  group  made  it  appear  that  firm  members  or 
directors  in  the  institutions  mentioned  held : 

"One  hundred  and  eighteen  directorships  in  34  banks  and  trust 
companies  having  total  resources  of  $2,679,000,000  and  total  deposits 
of  $1,983,000,000. 

"Thirty  directorships  in  10  insurance  companies  having  total  assets 
of  $2,293,000,000. 

"One  hundred  and  five  directorships  in  32  transportation  systems 
having  a  total  capitalization  of  $11,784,000,000  and  a  total  mileage 
(excluding  express  companies  and  steamship  lines)  of  150,200. 

"Sixty-three  directorships  in  24  producing  and  trading  corporations 
having  a  total  capitaUzation  of  $3,339,000,000. 

"Twenty-five  directorships  in  12  public  utility  corporations  having 
a  total  capitalization  of  $2,150,000,000. 

"In  all,  341  directorships  in  112  corporations  having  aggregate 
resources  or  capitalization  of  $22,245,000,000."  ^ 

Other  instruments  of  concentration.  —  While  the  corporation 
is  one  of  the  chief  devices  used  by  our  business  men  who  desire 
to  concentrate  control  over  large  masses  of  social  resources, 
it  is  by  no  means  the  only  one.  There  is  a  whole  series  of  other 
devices  that  accomplish  concentration  of  control.  Sometimes 
there  are  friendly  understandings  between  supposed  com- 
petitors. These  are  called  "  gentlemen's  agreements."  Other 
methods  are  trade  associations,  definite  agreements  and  pools, 
control  of  patents,  leases  of  property,  and  definite  consolidation 
and  amalgamation.  For  this  definite  consolidation  and  amalga- 
mation the  corporation  is  likely  again  to  be  called  into  play. 

One  of  the  most  common  things  in  business  life  is  the  tacit 
understanding,  or  "gentlemen's  agreement,"  as  to  how  men  will 
act  in  certain  contingencies.  It  is,  of  course,  not  always 
connected  with  schemes  for  concentration  of  control.  For 
example,    a    gentlemen's   understanding    between    two    retail 

1  Adapted  from  the  Report  of  the  Committee  to  Investigate  the  Concentration  of  Control 
of  Money  and  Credit,  February  28,  1913,  pp.  86-89. 


298  OUR   ECONOMIC   ORGANIZATION 

grocers  that  each  will  not  speak  disrespectfully  of  the  other's 
business  could  hardly  be  called  concentration  of  control.  It  is, 
however,  used  to  accomplish  concentration,  and  when  the  parties 
using  it  are  a  group  of  the  dominating  spirits  we  have  referred 
to  in  another  connection,  the  concentration  may  be  very  great. 
It  may  take  the  form  of  an  agreement  to  divide  the  field,  to 
limit  the  output,  to  pay  certain  prices  for  raw  material,  to  grant 
only  certain  concessions  to  labor,  to  assume  a  certain  attitude 
with  respect  to  legislation  and  social  control  —  to  cite  only 
a  few  of  these  "  understandings." 

A  good  illustration  of  the  use  of  this  device  is  found  in  the 
history  of  the  steel  business.  In  1907  the  officers  of  the  United 
States  Steel  Corporation  on  various  occasions  invited  the 
officers  and  directors  of  many  of  its  competitors  to  join  them 
at  meetings  where  there  could  be  a  "  full  exchange  of  infor- 
mation as  to  the  condition  of  various  businesses  represented 
and  a  frank  interchange  of  views  with  regard  to  the  business 
situation."  These  persons  denied  that  plans  were  laid  at 
these  meetings  to  stifle  competition  or  exercise  monopoly  control. 
We  do  not  need  to  inquire  concerning  the  truthfulness  of  this 
denial.  The  meetings  were  used  to  obtain  understandings ; 
they  enabled  the  companies  represented  better  to  manage  and 
better  to  control  their  steel  plants  in  relation  to  each  other. 
These  meetings,  which  had  their  social  as  well  as  their  business 
side,  came  to  be  known  as  the  Gary  dinners,  and^one  occasion- 
ally still  hears  humorous  references  to  the  dinner  party  as  a 
form  of  business  organization. 

A  trade  association  is  a  group  of  business  men,  manufac- 
turers, dealers,  or  producers,  who  have  formed  an  organization. 
Generally  this  organization  has  only  incidentally  the  purpose 
of  concentrating  control.  The  constitutions  and  by-laws  of 
such  associations  are  likely  to  say  that  they  have  been  formed 
to  advance  the  general  welfare  and  prosperity  of  the  industry. 
In  practice,  they  concern  themselves  with  a  wide  range  of 
activities,  such  as  cooperative  advertising ;  standardized  cost- 
accounting  for   the   industry ;    standardization   of   materials, 


CONCENTRATED   CONTROL  299 

processes,  and  products;  establishment  of  credit  bureaus  and 
collection  agencies;  provision  for  general  features  of  labor 
administration  such  as  the  establishment  of  employment 
bureaus  and  schemes  of  apprenticeship  and  trade  education ; 
supplying  insurance  to  members ;  promoting  state  and  federal 
legislation  in  the  interest  of  their  business ;  promoting  organiza- 
tions and  methods  to  bring  about  better  marketing  facilities 
(especially  in  foreign  trade) ;  and  occasionally  the  establishment 
of  uniform  terms  of  sale  and  even  of  price  control  —  though 
this  last  activity  must  be  carefully  conducted  lest  federal  law 
be  violated.  The  influence  of  these  associations  is  very  great. 
Such  organizations  as  the  Chamber  of  Commerce  of  the  United 
States  of  America,  or  the  National  Industrial  Conference  Board, 
which  is  made  up  of  a  group  of  large  emploj'ers'  associations, 
or  the  American  Farm  Bureau  Federation  (and  one  might, 
without  stretching  matters  unduly,  include  the  American 
Federation  of  Labor),  profoundly  influence  the  actions  of  their 
members,  and  a  very  real  concentration  of  control  rests  with 
their  leading  spirits. 

Gentlemen's  agreements  and  trade  associations  are  after  all 
rather  loose  and  somewhat  vague  methods  of  concentrating 
control.  Definite  agreements  (sometimes  they  are  formal 
contracts)  and  pools  are,  on  the  other  hand,  definite  devices 
for  accomplishing  this  result.  They  assume  several  forms,  and 
have  at  one  time  or  another  been  used  quite  considerably  by 
manufacturing  and  selling  industries,  and  by  our  railroads. 
There  is,  for  example,  the  traffic  pool  in  which  the  various  com- 
petitors agree  on  the  volume  of  business  which  shall  be  done  by 
each,  and  if  necessary  divert  business  from  one  establishment 
to  another  in  order  to  maintain  the  volumes  agreed  upon. 
Sometimes  they  have  given  special  inducements  (which  we 
have  come  to  regard  as  generally  improper)  to  some  concern 
if  it  will  act  as  the  "  evener  "  in  making  this  adjustment.  The 
Chicago  packers  were  once  a  famous  evener  for  the  competing 
railroads  to  the  east.  In  money  pools,  the  earnings,  no  matter 
by  what  company  earned,  are  pooled,  and  each  gets  its  pre- 


300  OUR   ECONOMIC   ORGANIZATION 

viously  agreed  upon  share  of  these  earnings.  In  divisions  of 
territory  spheres  of  influence  are  marked  out,  —  one  company 
to  have  undisputed  sway  in  a  certain  territory,  a  different  com- 
pany to  control  in  another  territory.  Or  there  may  be  a  price- 
fixing  agreement,  either  with  or  without  some  penalty  being 
imposed  upon  a  firm  which  violates  the  agreement.  A  survey 
of  these  various  forms  of  definite  agreements  and  pools  will  show 
that  they  can  be  used,  and  indeed  upon  occasion  they  have  been 
used,  to  stifle  competition  and  bring  about  monopoly  control. 
As  we  shall  see  later,  such  use  of  this  device  is  forbidden.  It 
does  not  follow,  however,  that  it  is  always  easy  to  catch  the 
offender. 

Another  device  which  has  been  used  to  accomplish  con- 
centration of  control  is  control  of  patents.  In  its  simplest 
form,  it  is  illustrated  when  some  basic  patent  is  of  such  vital 
importance  that  a  concern  which  is  unable  to  use  it  cannot  hope 
to  be  a  successful  competitor,  and  the  firm  which  can  use  it 
occupies  more  and  more  of  the  field.  The  more  complex  form, 
and  one  which  our  present  laws  do  not  sanction,  is  found  where 
a  group  of  large  firms  assign  their  patents  to  some  company 
controlled  by  them,  and  this  company  then  permits  the  use  of 
these  patents  only  under  conditions  which  will  not  be  harmful 
to  the  original  firms. 

The  lease  is  another  scheme.  It  is  quite  common  for  one 
concern  to  lease  part  or  all  of  its  property  to  another.  During 
the  term  of  the  lease,  control  is  of  course  vested  in  the  lessee. 
It  need  hardly  be  pointed  out  that  this  device  is  used  by  very 
small  concerns  as  well  as  by  the  larger  ones. 

There  ought  to  be  mentioned,  because  of  the  historical  interest 
involved,  the  original  trust,  a  device  no  longer  used  because  the 
courts  have  declared  it  illegal.  This  scheme  was  started  in 
1882  by  the  Standard  Oil  Trust.  The  idea  of  a  trust  or  trustee- 
ship is  an  old  one.  Men  have  for  centuries  put  property  in 
trust  with  some  responsible  person  or  institution,  when  they 
wished  it  wisely  administered  after  their  death.  Every  one 
has  heard  of  the  heirs  of  rich  men  whose  property  is  held  in 


CONCENTRATED   CONTROL  301 

trust  by  an  individual  or  by  a  trust  company.  So  also  are 
funds  for  endowed  institutions  —  universities,  churches, 
hospitals  and  libraries,  put  in  trust  and  controlled  by  trustees. 
The  use  of  this  trustee  idea  was  adopted  by  the  Standard  Oil 
Company.  The  stockholders  of  the  different  companies 
entering  the  combination  "  signed  over  "  their  stock  in  trust 
(hence  the  name)  to  a  board  of  trustees,  giving  over  also  the 
right  to  demand  the  return  of  theu'  stock.  Thus  the  trustees 
had  power  to  control  all  of  the  several  different  corporations 
which  entered  the  combination.  As  trustees  of  all  the  com- 
panies, it  is  easy  to  see  that  their  interests  lay  in  eliminating 
competition  and  directing  the  whole  affair  as  a  monopoly.  This 
is  the  beginning  of  the  term  "  trust,"  which  we  now  use  in  a 
popular  sense  to  mean  any  organization  which  is  large  enough 
substantially  to  control  the  field  of  business  in  which  it  operates. 

During  the  period  of  the  great  war,  the  United  States  Govern- 
ment passed  a  law  known  as  the  Webb  bill  which  permitted 
individual  companies  to  combine  and  take  cooperative  action 
for  purposes  of  exporting.  Congress  apparently  in  passing  this 
law  believed  that  the  United  States  could  push  its  trade  abroad 
better  by  means  of  combinations,  and  that  any  losses  would 
be  more  than  offset  by  the  gains  of  such  a  scheme.  Then,  too, 
during  the  war  period  the  United  States  Government  did  much 
to  encourage  many  forms  of  business  to  act  more  or  less  in 
unison,  in  order  that  the  productive  forces  of  the  country  could 
be  better  controlled  for  the  purposes  of  winning  the  war. 
During  this  period  practically  all  of  the  suits  which  were 
pending  in  the  United  States  courts  against  so-called  trusts 
were  not  pushed.  The  government's  attitude  during  the  war 
period  was  altogether  less  aggressive  toward  monopoly  than 
it  had  been  prior  to  the  war. 

Motives  behind  concentration  of  control  and  its  consequences. 
—  Having  seen  some  of  the  methods  used  in  concentrating 
control,  let  us  now  see  that  these  methods  have  been  used  to 
bring  about  combinations  or  trusts,  and  what  some  of  the 
consequences  of  this  movement  have  been. 


302       OUR  ECONOMIC  ORGANIZATION 

Some  of  the  leading  motives  for  concentration  of  control  have 
already  been  discussed  in  our  study  on  the  size  of  maximum 
efficiency  of  the  business  unit  (Study  XV).  The  reader  who 
does  not  have  fairly  clearly  in  mind  the  advantages  possessed 
by  the  large-scale  enterprise  (a)  through  reduction  of  production 
costs,  (6)  through  better  and  cheaper  methods  of  bearing  risk, 
(c)  through  savings  and  increased  efficiency  in  administration, 
and  (d)  through  better  marketing  and  financial  facilities,  would 
do  well  to  review  that  material,  for  the  material  we  are  now 
to  take  up  is  very  closely  connected  with  it.  It  ought  to  be 
remembered  also  that  the  social  environment  was  such  as  to 
make  possible  the  development  of  these  large-scale  enterprises. 

Concentration  may  readily  lead  to  the  trust.  —  And  now 
we  are  to  take  one  step  farther.  To  the  various  reasons 
already  enumerated  for  the  emergence  of  large-scale  enterprise 
we  must  add  another  powerful  factor,  the  desire  for  monopoly 
gains,  and  still  another,  the  evils  of  cutthroat  competition,  and 
we  have  the  trust. 

We  have  seen  repeatedly  that  most  of  the  advantages  of 
large-scale  enterprise  can  be  secured  without  the  existence  of 
monopoly.  That  is  quite  true.  But  now  notice  that  if  a  con- 
cern has  monopoly  (which  does  not  necessarily  mean  100  per 
cent  control,  for  60  per  cent  or  even  less  is  sometimes  "effective  "), 
it  has  the  advantages  of  large-scale  enterprise,  and  it  has  also 
a  plus.  The  plus  includes  (because  it  is  the  only  significant 
firm  in  its  field)  stronger  bargaining  position  with  the  suppliers 
of  raw  materials,  with  labor,  and  with  consumers;  greater 
ability  to  predict  prices,  output,  etc.,  and  thus  greater  control 
over  risks.  Men  engaged  in  business  for  gain  naturally  de- 
sired to  get  this  "  plus."  We  must  remember  too,  that  in  the 
last  quarter  of  the  nineteenth  century  production  in  many 
kinds  of  manufactured  goods  was  increasing  more  rapidly  than 
was  the  market  (see  p.  118)  so  that  men  were  fighting  for 
markets  at  the  very  time  when  the  presence  of  indirect  costs 
tended  to  make  their  competition  of  the  cutthroat  variety. 
Especially  significant  were  the  conditions  arising  after  the  Civil 


CONCENTRATED   CONTROL  303 

War.  The  government  had  for  war  purposes  been  buying  large 
quantities  of  goods  and  many  great  concerns  had  grown  up 
rapidly  in  an  effort  to  supply  these  goods.  Also,  during  the  Civil 
War  period  prices  had  been  high  and  this  had  encouraged  the 
growth  of  many  factories  and  other  productive  organizations. 
With  the  conclusion  of  the  war,  government  demands  slackened 
and  prices  fell,  making  profits  for  all  of  these  concerns  more 
difficult  to  secure.  A  result  of  this  was  a  strong  urge  toward 
combination  and  monopoly.  It  is  not  very  surprising  that  the 
gain  spirit  impelled  men  to  form  combinations. 

Because  of  this  general  background  situation,  there  began  in 
the  1870's  the  movement  known  as  the  "trust  movement,"  which 
means,  of  course,  the  movement  for  the  formation  of  enterprises 
which  had  such  great  concentration  of  control  as  practically 
to  constitute  monopoly  in  certain  lines.  The  most  active 
period  in  the  formation  of  trusts  was  in  the  few  years  im- 
mediately following  1898.  But  they  have  been  with  us  in 
rather  large  numbers  throughout  the  entire  generation. 

Trusts  have  been  vigorously  opposed.  —  They  have  by  no 
means  been  received  by  the  people  with  open  arms.  They  have 
been  from  the  first  regarded  with  suspicion  and  hostility,  and 
their  later  history  has  not  been  such  as  to  cause  this  suspicion 
and  hostility  to  wane.  The  charges  that  have  been  made 
against  the  trusts  and  for  that  matter  are  still  made  against 
them  may  be  summed  up  as  follows :  (1)  It  is  urged  that  in 
their  desire  for  monopoly  gains  they  manipulate  prices.  Since 
they  are  in  effect  the  sole  market  for  the  producer  of  raw 
materials  they  give  him  less  than  he  would  get  in  a  regime  of 
free  competition ;  since  they  are  in  effect  the  sole  producer, 
they  charge  the  consumer  more  than  he  would  pay  in  a  com- 
petitive regime,  for  they  fix  the  price,  under  the  so-called  law 
of  monopoly  profits,  at  the  point  at  which  they  will  make  the 
greatest  net  gain.  (2)  It  is  urged  that  they  have  too  frequently 
violated  the  moral  if  not  the  legal  rights  of  the  minority  stock- 
holders; that  "insiders"  have  engaged  in  manipulation  of 
corporate  securities ;  and  that  investors  have  suffered  for  these 


304  OUR  ECONOMIC   ORGANIZATION 

and  for  other  reasons.  These  are,  of  course,  really  problems 
in  corporation  finance ;  they  might  equally  well  be  true  of  a 
small  concern.  The  magnitude  of  corporate  securities  in  the 
trust,  however,  calle.d  particular  attention  to  its  operations. 
(3)  It  is  urged  that  they  have  had  unfortunate  consequences 
for  the  worker.  Attention  has  been  called  not  only  to  the 
way  in  which  they  have  increased  impersonal  relations  between 
employer  and  worker,  but  also  to  the  fact  that  their  size  and 
monopoly  position  give  them  a  strong  bargaining  position 
with  respect  to  labor,  —  give  them  here,  also,  a  control  of 
prices.  (4)  It  is  urged  that  these  monopoly  gains  are  con- 
centrated in  relatively  few  hands,  and  that  this  tends  to  bring 
about  a  more  and  more  unequal  distribution  of  wealth  in  our 
society  —  a  condition  which  ought  not  to  be  tolerated  in 
a  democracy  which  demands  for  its  citizens  equality  of  oppor- 
tunity. (5)  Certain  unfavorable  general  social  consequences 
are  also  charged  against  them.  It  is  said  that  they  have  been 
corrupting  our  political  hfe  through  the  bribing  of  legislators 
and  judges ;  that  they  set  low  standards  of  business  morality 
by  emphasizing  quick  gains,  unscrupulously  secured,  rather  than 
gains  flowing  from  rendering  real  service  to  man  ;  that  they  are, 
in  brief,  actually  the  monsters  referred  to  in  our  discussion  of 
the  corporation  —  huge  organizations  with  great  power  and 
little  sense  of  responsibility.  It  is  charged  also  that  poor 
products  have  been  made  by  these  great  organizations. 
(6)  The  use  of  unfair  methods  in  harassing  and  destroying 
competitors  has  been  one  of  the  most  serious  charges  made 
against  the  trusts.  Prices,  it  is  charged,  have  been  cut  in 
certain  localities  merely  to  destroy  a  competitor  and,  without 
giving  any  gain  to  the  consumer,  rebates  have  been  given. 
The  public  have  been  made  to  believe  they  were  dealing  with 
competitors  when  in  reality  they  were  dealing  with  the  trusts 
through  the  creation  of  "  bogus  "  independents,  that  is,  business 
houses  that  deceitfully  appeared  to  be  separate  from  the  trust. 
Lawsuits  have  been  instituted  against  competitors  merely  to 
involve  them  in  expense  and  delay,  especially  in  the  use  of 


CONCENTRATED   CONTROL  305 

patents.  These  are  but  a  few  of  the  methods  which  com- 
petitors have  charged  against  the  trusts  as  unfair  competition. 
(7)  The  trusts,  it  is  argued,  have  checked  progress.  Com- 
petition is  the  chief  method  upon  which  we  rely  to  weed  out 
the  less  efficient  business  houses  and  business  methods  and  to 
establish  the  more  efficient  ones.  In  so  far  as  the  trusts  have 
checked  competition,  they  have,  it  is  argued,  stultified  our 
social  method  of  improvement.  (8)  Finally,  it  is  urged  that 
in  our  manufacturing  and  selling  businesses  at  least,  there  is 
not  good  reason  for  the  point  of  view  of  society  for  tolerating 
such  monopolies  ;  that  we  may  have  all  the  advantages  of  large- 
scale  enterprise  without  allowing  monopoly  control. 

The  mere  size  of  these  organizations  gives  some  people  pause. 
Says  Carver :  ^ 

"It  is  sometimes  asserted  that  the  mere  size  of  a  corporation  should 
not  affect  its  standing  before  the  law,  or  its  rights  and  obligations. 
In  the  sense  in  which  this  assertion  is  probably  intended,  it  is  correct ; 
but  if  it  is  intended  to  imply  that  a  corporation  requires  no  more  legal 
control  when  it  is  large  than  when  it  is  small,  it  is  imtrue.  The  larger 
the  corporation,  the  greater  is  its  power,  either  for  good  or  for  evil,  and 
that  makes  it  especially  important  that  its  power  be  under  control  .  .  . 

"If  I  may  use  a  homely  illustration,  I  will  take  the  common  house 
cat,  whose  diminutive  size  makes  her  a  safe  inmate  of  our  household 
in  spite  of  her  playful  disposition  and  her  liking  for  animal  food.  If, 
without  the  slightest  change  of  character  or  disposition,  she  were  sud- 
denly enlarged  to  the  dimensions  of  a  tiger,  we  should  at  least  want 
her  to  be  muzzled  and  to  have  her  claws  trimmed,  whereas  if  she  were 
to  assume  the  dimensions  of  a  mastodon,  I  doubt  if  any  of  us  would 
want  to  live  in  the  same  house  with  her.  And  it  would  be  useless  to 
argue  that  her  nature  had  not  changed,  that  she  was  just  as  amiable 
as  ever,  and  no  more  carnivorous  than  she  always  had  been.  Nor 
would  it  convince  us  to  be  told  that  her  productivity  had  greatly  in- 
creased and  that  she  could  now  catch  more  mice  in  a  minute  than  she 
formerly  could  in  a  week.  We  should  be  afraid  lest,  in  a  pla^-ful  mood, 
she  might  set  a  paw  upon  us,  to  the  detriment  of  our  epidermis,  or  that 
in  her  large-scale  mouse-catching  she  might  not  always  discriminate  be- 
tween us  and  mice." 

1  T.  N.  Carver,  fissa^/s  in  Social  Justice,  pp.  329-332. 


306  OUR  ECONOMIC    ORGANIZATION 

While  minor  flaws  may  be  picked  here  and  there  in  this 
arraignment  of  business  monopoly,  it  must  be  said  that  the 
defenders  of  monopoly  have  never  been  able  to  make  an 
answer  satisfactory  to  expert  students,  or  to  the  public.  It 
is  generally  believed  that  most  of  the  trusts  or  monopolies 
which  we  have  had  in  our  ordinary  manufacturing  and  market- 
ing industries  cannot  be  successfully  defended  on  the  ground 
of  service  rendered  society.  In  such  industries  large-scale 
production  frequently  seems  worth  while ;  monopoly  seldom,  if 
ever,  seems  so,  —  certainly  not  unregulated  monopoly. 

Remedial  action  has  taken  different  forms.  —  But  if  the 
position  of  the  monopolist  in  manufacturing  and  marketing 
industries  has  been  weak  in  logic  and  in  service  rendered  society, 
it  has  been  strong  in  its  practical  hold  on  the  situation.  From 
the  very  first  war  has  been  waged  against  the  trust,  but  the 
war  still  continues  and  it  is  by  no  means  certain  that  the  out- 
come up  to  the  present  time  has  been  better  than  a  draw  for 
the  public. 

In  the  earlier  stages  of  the  contest  there  was  a  fairly  general 
acceptance  of  the  doctrine  of  "  regulation  by  the  ax."  In 
essence  this  doctrine  is :  monopoly  is  bad,  monopoly  should  be 
exterminated  and  competition  restored.  This  doctrine  moved 
our  national  legislators  when  in  1887  they  forbade  the  railroads 
to  form  pools,  ordered  them  to  be  ruled  by  competition,  and  set 
up  the  Interstate  Commerce  Commission  as  a  regulating  body. 
It  also  moved  them  to  pass  the  Sherman  Anti-trust  Law  of  1890, 
which  declared : 

"1.  Every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations  [includes  territories  and  District  of  Co- 
lumbia], is  hereby  declared  to  be  illegal.  Every  person  who  shall 
make  any  such  contract,  or  engage  in  any  such  combination  or  con- 
spiracy, shall  be  deemed  guilty  of  a  misdemeanor,  and,  on  conviction 
thereof,  shall  be  punished  by  fine  not  exceeding  five  thousand  dollars, 
or  by  imprisonment  not  exceeding  one  year,  or  by  both  said  punish- 
ments, in  the  discretion  of  the  court. 


CONCENTRATED   CONTROL  307 

"2.  Everj'  person  who  shall  monopolize,  or  attempt  to  monopolize, 
or  combine  or  conspire  with  any  other  person  or  persons  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the  several  states,  or  with 
foreign  nations,  shall  be  deemed  guilty  of  a  misdemeanor,  and,  on  con- 
viction thereof,  shall  be  punished  by  fine  not  exceeding  five  thousand 
dollars,  or  by  imprisonment  not  exceeding  one  year,  or  by  both  said 
I^imishments,  in  the  discretion  of  the  court. 

"8.  That  the  word  'person'  or  'persons'  wherever  used  in  this  act, 
shall  be  deemed  to  include  corporations  and  associations  existing  under 
or  authorized  by  the  laws  of  either  the  United  States,  the  laws  of  any 
of  the  territories,  the  laws  of  any  state,  or  the  laws  of  any  foreign 
coimtry."  ^ 

Its  influence  has  been  responsible  for  quite  similar  action  on 
the  part  of  many  of  our  state  legislatures. 

"  Regulation  by  the  ax "  has  not,  however,  proved  tre- 
mendousl}^  effective  although  it  still  has  considerable  vogue. 
The  trouble  with  it  is  that  action  can  be  taken  only  after  the 
trust  has  been  formed.  The  offender  is  then  haled  before  the 
courts,  the  trial  is  likely  to  last  years,  and  even  if  the  trust  is 
ordered  to  dissolve,  it  is  likely  to  adopt  some  other  form  of 
combination  and  the  whole  tiresome  process  must  be  gone 
through  again.  All  of  this  would  be  a  good  deal  like  locking 
the  stable  door  after  the  horse  has  been  stolen  were  it  not  for 
the  fact  that  the  door  never  seems  to  get  really  locked. 

In  recent  years  we  have  been  trying  other  forms  of  control 
which  we  hope  may  prove  to  be  more  useful.  While  still 
"  regulating  by  the  ax  "  when  a  proper  case  arises  for  its  use, 
we  seem  to  be  beginning  to  work  more  on  the  causes  leading  to 
monopoly  rather  than  being  content  merely  with  using  the  ax 
on  monopoly  after  it  has  emerged.  Examples  of  this  newer 
movement  are  found  in  the  so-called  Seven  Sisters  of  New 
Jersey,  which  were  seven  laws  passed  by  that  state  in  1913 ;  in 
the  Federal  Trade  Commission  act  of  1914  and  the  Clayton 
Anti-trust  Act  of  the  Federal  Government  of  the  same  year. 

»  U.  S.  Comp.  Stat.  Ann.  Vol.  8,  Sec.  8820,  8821,  and  8830.  Also  Fed.  Stat.  Ann.  Second 
edition.  Vol.  9,  pp.  644,  687,  and  726. 


308  OUR  ECONOMIC  ORGANIZATION 

In  the  new  movement  there  is  a  tendency  to  turn  to  laws  for- 
bidding discriminations  between  persons  or  communities  by 
selHng  to  one  at  a  lower  rate  than  to  another ;  to  laws  protecting 
minority  stockholders  and  regulating  the  issuance  of  corporate 
securities,  —  applicable  equally  to  large  and  to  small  corpora- 
tions ;  to  laws  stating  in  general  terms  that  no  one  has  a  right 
to  use  unfair  methods  of  competition  and  then  setting  up  an 
investigating  and  administering  body  to  define  unfair  methods, 
to  gather  information  concerning  improper  practices,  to  make 
public  its  findings,  and  to  bring  suit  against  the  offender  if 
necessary;  to  laws  forbidding  the  holding  of  the  securities 
of  one  corporation  by  another,  when  such  holding  tends  to 
stifle  competition,  or  forbidding  interlocking  directorates  un- 
der similar  conditions.  We  are  experimenting  also  with  laws 
which  put  some  limitations  on  the  rights  of  patent  ownership, 
laying  down  regulations  for  the  conditions  under  which  they 
may  lease  their  patent  rights  in  such  a  way  as  to  control  the 
manufacture  of  a  product  widely  and  for  a  long  period  of  time. 
One  of  the  most  interesting  methods  of  the  newer  viewpoint 
is  the  Federal  Trade  Commission.  This  body  of  five  members 
is  appointed  by  the  President  and  has  broad  powers  to  gather 
information  about  business  practices  and  to  make  rulings  that 
will  keep  competition  operative.  It  is  too  early  to  predict 
the  outcome  of  this  newer  movement.  We  can  only  say  that 
it  looks  more  promising  than  attempts  merely  to  exterminate. 

Wliile  it  certainly  does  not  deserve  more  than  mere  mention, 
it  ought  to  be  said  that  a  few  people  believe  in  a  ''  let  alone 
policy  "  for  the  trusts.  These  optimists  believe  that  little  or 
no  action  by  society  is  necessary  in  the  case.  Few  accept  this 
position.  There  is  growing  into  our  attitude  toward  the 
trusts  a  very  clear  notion  that  some  trusts  under  certain  con- 
ditions are  reasonable  and  not  undesirable.  It  is  quite  certain 
that  the  attitude  of  the  general  public  is  less  severe  toward  the 
trusts  than  it  was  twenty  or  even  ten  years  ago.  Perhaps 
the  best  illustration  of  this  changed  viewpoint  is  in  the  case 
above  mentioned  concerning  the  Webb  Law  and  also  in  laws 


CONCENTRATED   CONTROL 


309 


which  permit  shipping  companies  to  combine  and  act  as  monopo- 
lies under  certain  conditions. 

Various  kinds  of  monopoly  and  their  control.  —  The  whole 
problem  of  monopolies  in  modern  industry  is  so  complex  and 
puzzling  that  it  may  help  us  think  more  clearly  if  we  make 
a  classification  of  the  outstanding  kinds  of  monopoly  to-day. 
Such  a  classification  (which  will  be  explained  below)  might  be 
made  as  follows : 


Legal  monopolies 

a.  Those  concerns  given  a  mo-  f 

nopoly  apparently  on  the 
theory  that  it  is  socially  i 
wise  to   protect  a  private  i 
interest.     Examples  are :      ^ 

b.  Those  concerns  given  a  mo- 

nopoly (usually  regulated) 
apparently  on  the  theory  ^ 
that  they  are  vested  with 
a    public    interest.       Ex- 
amples are : 


Trade  marks 

Patents 

Copyright 

Business  monopolies  bj'  state 
action 

Water,  gas,  electricity,  tele- 
graph, and  telephone  com- 
panies 

Street  railways 

Railroads 

Wharves,  docks 


Diamond  mines  of  Africa 
Anthracite  coal  in  the  United 

States 
Agricultural  monopolies  such 
[      as  that  of  the  raisin  growers 


In  extractive  industries 
In  manufacturing 
In  finance 
In  marketing 


Monopolies  \  Natural  resource  monopolies 

a.  Those  depending  on  physical 
limitations  in  supply  of 
goods,  such  as: 

"  Capitalistic"  monopolies  found : ' 
a.  Those     depending     on     the 

economies    of     large-scale 

production 
h-  Those    depending    on    agree- 
ments 
c.  Those   depending  on   special 

favors,  such  as  rebates 
d-  Those    depending   on    unfair 

methods    of    competition, 

etc. 

It  will  be  noticed  that  the  legal  monopolies  are  those  which 
are  definitely  authorized  and  encouraged  by  society  on  the 
ground  that  monopoly  is  a  useful  device  in  such  cases.  Authors 
are  to  be  encouraged  to  produce  useful  ideas  by  copyright  laws 
giving  them  monopoly  control  of  the  publication  of  those  ideas 
for  a  period  of  years ;  inventors  are  to  be  similarly  encouraged 
for  a  similar  reason  ;  trade  marks  presumably  are  to  be  protected 
on  the  ground  that  they  are  useful  antidotes  to  modern  anony- 


310  OUR  ECONOMIC   ORGANIZATION 

mous  production ;  some  European  governments  authorize 
monopolistic  trade  in  certain  lines,  such  as  the  tobacco  monopoly 
in  France,  either  as  a  means  of  regulating  consumption -or  as  a 
means  of  getting  revenue.  But  there  is  another  type  of  monop- 
oly authorized  by  law.  We  find  the  best  examples  of  this 
type  in  those  activities  that  we  think  of  as  public  service  com- 
panies —  those  concerns  that  we  have  come  to  feel  are  for  public 
rather  than  private  use. 

It  is  generally  believed  that  monopolies  in  certain  fields  of 
public  service  —  regulated  monopohes,  of  course  —  give  us  better 
service  than  competitive  industry.  The  reasons  for  this  be- 
lief vary  according  to  the  case.  Sometimes,  it  is  because  of  the 
physical  difficulty  involved  in  putting  in  more  than  one  plant 
for  a  given  purpose ;  our  streets  would  not  have  sufficient  space 
for  numbers  of  lines  of  railway  track,  gas  mains,  or  water  sys- 
tems. Sometimes,  it  is  because  the  service  rendered  by  these 
public  utilities  can  be  given  only  to  the  consumers  who  have 
instruments  directly  connected  with  the  central  plant  (the  tele- 
phone is  a  good  illustration)  and  better  service  can  be  rendered 
if  all  are  connected  with  the  same  plant. 

But  of  course  these  public  utility  monopolies  ought  not  to  be 
permitted  to  "  run  wild."  They  ought  to  be  regulated.  In 
the  main,  we  use  in  the  United  States  two  types  of  regulation 
for  such  industries.  Sometimes  we  control  them  by  regulating 
or  fixing  the  profits  they  are  permitted  to  make,  or  the  prices 
they  are  permitted  to  charge.  This  is  not  an  easy  thing  to 
do.  It  involves  very  careful  accounting  and  very  delicate  super- 
vision of  industries  having  such  heavy  indirect  costs.  Sometimes 
we  control  them  by  having  them  owned  and  operated  by  the 
municipality  or  state.  Even  this  is  not  as  simple  as  it  sounds. 
Our  standards  of  public  administration  in  this  country  are  not 
very  high  and  such  publicly  owned  industries  are  by  no  means 
always  efficiently  managed. 

The  second  kind  of  monopoly,  natural  monopoly,  is  found 
when  the  physical  supply  of  (;ertain  goods  or  the  raw  materials 
for  making  these  goods  is  limited,  and  in   such  a  case  it  is 


CONCENTRATED   CONTROL  311 

relatively  easy  for  some  person  or  group  to  control  output. 
In  the  outline,  page  309,  it  is  suggested  that  the  Kimberley 
Diamond  mines  in  Africa  furnish  an  example  of  such  a  mo- 
nopoly. The  hmited  area  in  which  anthracite  coal  could 
be  mined  in  the  United  States  also  furnished  the  basis  for  an 
attempted  monopoly  in  that  field.  Raisin  growers  in  California 
are  in  such  a  naturally  strong  position  as  to  have  a  monopoly. 
At  one  time  there  were  very  few  known  beds  of  asphalt  in 
the  world  and  a  few  men  secured  control  of  these  and  held  a 
monopoly. 

The  third  group  of  monopolies  are  capitalistic  monopolies. 
Capitalistic  monopolies  sometimes  result  from  the  concentra- 
tion of  large  amounts  of  capital  —  so  large  that  competitors 
may  be  bought  out.  Special  privilege,  unfair  competition,  or 
agreements  among  nominal  competitors  may  also  lead  to  mo- 
nopolies which  are  classed  under  this  head.  As  we  have  seen, 
we  are  somewhat  doubtful  whether  they  ought  to  be  permitted 
at  all,  but  we  are  not  at  all  doubtful  concerning  the  difficulty 
either  of  eliminating  them  or  of  properly  regulating  them.  We 
want  to  have  in  our  industries  business  units  of  the  most  effi- 
cient size ;  but  we  want  to  prevent  their  becoming  monsters 
with  great  power  and  little  sense  of  responsibility.  If  they  are 
to  continue  among  us,  we  must  find  some  way  of  getting  rid 
of  the  evils  which  up  to  the  present  time  have  been  connected 
with  them.  Society  has  discovered  powerful  means,  such  as 
the  machine  and  large-scale  industry,  of  producing  goods.  But 
these  methods  have  brought  us  new  problems  of  control.  We 
are  like  the  fisherman  who  pulled  from  the  sea  a  vessel  out  of 
which  came  a  genie  capable  of  doing  him  great  good  or  evil. 
Can  we  control  the  genie  that  has  come  out  of  the  vessel  we 
have  opened? 

PROBLEMS 

1.  Define  or  explain:  (1)  the  voting  trust,  (2)  limited  voting, 
(3)  holding  company,  (4)  trusts,  (5)  monopoly,  (6)  pool,  (7)  inter- 
locking directorates,  (8)  amalgamation,  (9)  Interstate  Commerce 
Commission,  (10)  Federal  Trade  Commission. 


312  OUR  ECONOMIC   ORGANIZATION 

2.  "The  corporation  has  made  possible  a  centraUzation  of  power." 
Show  four  ways  in  which  the  corporation  can  be  used  to  concentrate 
control. 

3.  "Very  frequently  a  solid  block  of  20%  of  the  stock  of  a  corpora- 
tion will  give  effective  control."  How  can  this  be  true  ?  Would  it  be 
true  under  a  system  of  limited  voting? 

4.  Explain  in  detail  two  processes  by  which  the  holders  of  ten 
million  dollars'  worth  of  securities  might  be  able  to  control  one  hundred 
million  dollars'  worth. 

5.  "Concentration  of  control  can  be  brought  about  through  the 
manipulation  of  securities."     Explain. 

6.  What  is  meant  by  saying  that  the  relationships  in  a  corporation 
have  caused  the  stockholder  to  have  a  small  sense  of  responsibility? 

7.  Why  should  we  be  concerned  with  preventing  certain  kinds  of 
interlocking  directorates?  Should  we  try  to  prevent  all  interlocking 
directorates  ? 

8.  Make  a  list  of  the  various  instruments  of  concentration  of 
control.  What  ones  of  these  may  be  used  without  any  idea  of  securing 
monopoly? 

9.  The  A-B-C  Corporation  is  a  holding  company.  It  has  ten 
thousand  shares  of  preferred  stock  and  two  thousand  shares  of  common 
stock.  The  common  .stock  has  all  the  voting  power.  This  company 
owns  a  controlling  interest  in  ten  other  corporations.  If  the  common 
stock  of  the  holding  company  is  selling  for  $100  a  share,  how  much 
money  would  you  need  to  secure  control  of  the  ten  corporations  ? 

10.  Can  you  learn  of  any  employers'  associations  in  your  town? 
If  there  arc  any,  do  they  serve  in  any  way  to  concentrate  control?  Do 
they  serve  other  purposes  also  ? 

11.  Explain  in  detail  how  control  of  patents  might  serve  to  give 
concentration  of  control. 

12.  Review  the  advantages  of  large-scale  production  (see  p.  262 
and  Problem  17  on  p.  266).  Consider  whether  in  each  case  monopoly 
is  necessary  to  secure  that  particular  advantage. 

13.  "Large-scale  production  tends  strongly  to  pass  over  into 
monopoly."     Why  or  why  not? 

14.  "  Monopoly  is  merely  the  final  stage  of  a  sequence  which  started 
with  the  introduction  of  machinery."     What  does  this  mean?    Does 


CONCENTRATED   CONTROL 


313 


there  appear  to  be  any  truth  in  the  statement  ?     What  is  the  relation 
of  indirect  costs  to  the  trust  movement  ? 

15.  "The  emergence  of  our  modern  trust  is  closely  connected  with 
the  fact  that  in  our  generation  the  production  of  certain  goods  has 
been  outrunning  the  market."     What  does  this  mean? 

16.  What  effect  might  the  abolition  of  proxy  voting  have  upon 
concentration  of  control?  What  would  be  the  effect  of  Umited 
voting  ? 

17.  In  1896  the  following  situation  existed : 


Company                                  Common  Stock 

Dividends 

A 
B 
C 

$3,000,000 
$2,000,000 
$1,000,000 

10  per  cent 

S  per  cent 

10  per  cent 

On  January  1, 1897,  a  holding  company,  D,  absorbs  all  their  stock,  and 
in  1897  D  gets,  in  addition  to  the  former  earnings  $500,000  monopoly 
profits,  and  $100,000  by  saving  the  wastes  of  competition.  What 
dividends  could  D  pay  if  its  capital  stock  were  $6,000,000? 

18.  Large-scale  production  has  often  been  beneficial  to  society  but 
it  has  sometimes  led  to  concentration  of  control  which  has  injured 
society.  Would  it  be  a  satisfactory  solution  of  this  problem  to  pass  a 
law  forbidding  large-scale  types  of  business  organization  ? 

19.  What  bearing  if  any  has  accounting  upon  the  regulation  of 
public  utilities?  Do  you  think  of  accounting  as  being  an  instrument 
which  society  may  use  in  controlUng  business  activity  ? 

20.  "It  is  a  great  mistake  to  confuse  the  corporation  problem  with 
the  trust  problem."  Name  some  matters  which  you  would  consider 
parts  of  the  corporation  problem.  Name  some  which  you  would 
consider  parts  of  the  trust  problem. 

21 .  Why  should  the  regulation  of  capitalistic  monopolies  be  regarded 
as  among  the  most  critical  problems  of  the  day? 

22.  Just  why  do  the  creation  of  the  Federal  Trade  Commission,  the 
passage  of  the  Clayton  Act,  and  the  passage  of  the  Seven  Sisters  of 
New  Jersey  seem  more  promising  ways  of  controlling  the  trust  than 
attempts  to  exterminate  ? 


314  OUR  ECONOMIC   ORGANIZATION 

23.  "The  investigating  commission  such  as  the  Federal  Trade 
Commission  is  a  new  institution  that  has  come  into  existence  to  aid  in 
controlUng  the  new  types  of  large-scale  business."     Explain. 

24.  "The  trusts  are  a  result  of  natural  growth."  "The  trusts  are 
a  result  of  artificial  conditions."  With  which  of  these  quotations  do 
you  agree  ?    Are  both  partly  true  ? 

25.  Give  reasons  for  and  against  having  competing  telephone 
companies  and  competing  gas  companies  in  the  same  city, 

26.  Make  a  list  of  the  ways  in  which  a  big  combination  like  the 
United  States  Steel  Corporation  might  be  of  benefit  to  society.  Of  the 
ways  in  which  it  might  be  harmful. 

27.  Mention  the  names  of  a  number  of  business  organizers  who  have 
concentrated  in  their  own  hands  large  control  of  capital. 

28.  It  is  sometimes  argued  that  great  industries  ought  to  be  taken 
over  by  the  government.  What  does  it  seem  to  you  would  be  the  ad- 
vantages and  disadvantages  of  such  a  move  in  the  case  of  the  steel 
industry? 

29.  "The  formation  of  trusts  was  inevitable.  The  financial 
machinery  of  society,  especially  the  corporation,  made  possible  the 
assembling  of  large  masses  of  capital.  The  expansion  of  markets  and 
machine  industry  made  such  assembling  wise.  The  pressure  of  indirect 
costs  made  competition  intolerable.  The  desire  for  monopoly  profits 
was  the  match  which  set  the  powder  off."  Explain  the  "why"  of  each 
statement. 

30.  Draw  up  an  outline  of  the  main  points  of  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  709-714,  Selections 
275-308. 

Taussig,  Principles  of  Economics:  Revised  Edition,  Vol.  II,  Chap. 
63. 

Ely,  Outlines  of  Economics:  Revised  Edition,  Chap.  13. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life : 
Series  A,  Lesson  A-25,  Wright,  "  The  Integration  of  the  Greatest 
Manufacturing  Concern  in  the  United  States." 
Lesson  A-26,  Clark,  "  Concentration  of  Control  in  the 
Railroad  Industry." 


STUDY  XVIII 
THE  GUIDANCE  OF  ECONOMIC  ACTIVITY 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  the  importance  of  correctly  apportioning  our  social  resources 

to  our  various  needs. 

2.  To  see  the  work  of  certain  agencies  in  effecting  apportionment. 

Balance  in  the  cooperation  of  specialists  is  very  important.  — 

Let  us  return  to  the  fact  that  our  society  is  made  up  of  special- 
ists. Most  of  us  specialize  in  the  making  of  some  one  good  or 
small  part  of  a  good,  or  in  the  rendering  of  some  one  service  or 
part  of  a  service.  Almost  no  one  produces  all  or  even  many  of 
the  things  he  consumes.  None  the  less,  our  wants  are  met  — 
inadequately  enough,  it  may  be,  but  met  nevertheless.  The 
multitudinous  specialists  are  welded  together,  by  authority 
and  through  exchange,  into  a  huge  want-gratifying  machine. 
And  the  machine  works. 

Let  us  now  go  a  step  farther  and  inquire  into  a  problem  which 
we  have  heretofore  passed  by  with  little  attention.  How  does 
it  come  about  that  this  want-gratifying  machine  turns  out  the 
"  right  "  amounts  of  the  various  goods  and  services  we  desire? 
What  brings  about  balance  and  proportion  in  the  cooperation 
of  modern  specialists? 

Balance  is  highly  desirable,  even  absolutely  essential,  in  our 
cooperation  of  specialists.  If  our  productive  energy,  —  land, 
labor,  capital,  acquired  knowledge  —  were  applied  in  such  an  un- 
balanced way  that  it  was  all  used  in  producing  clothes,  we  should 
find  ourselves  short  of  food  and  shoes  and  countless  other  com- 
modities and  services.  If  we  should  use  all  of  our  productive 
resources  in  producing  meat,  watches,  automobiles,  and  battle- 

315 


316  OUR   ECONOMIC   ORGANIZATION 

ships,  we  should  find  ourselves  lacking  in  physicians'  services, 
books,  houses,  and  all  the  other  multitudinous  means  of  grati- 
fying our  varied  wants.  In  actual  fact,  we  seldom  find  the 
things  we  want  existing  in  exactly  the  right  balance,  as  we  see 
the  matter.  Many  of  us  feel  that  it  would  have  been  better 
to  have  produced  fewer  pleasure  cars  and  more  medical  care, 
food,  and  clothing.  But  matters  could  be  so  much  worse  — 
so  much  more  poorly  balanced  —  that  we  have  come  to  say  that 
the  various  things  we  desire  are  available  for  us  in  roughly  the 
"  right  "  amounts.  In  some  manner  this  cooperation  of  ours, 
which  is  carried  out  by  authority  and  through  exchange,  is 
regulated  or  guided.  In  some  manner  our  productive  resources 
are  apportioned  so  that  we  have  in  roughly  appropriate  quan- 
tities the  various  kinds  of  commodities  and  services  we  desire. 

Productive  resources  must  be  apportioned  in  any  society.  — 
This  necessity  of  guiding  economic  activity,  —  of  apportioning 
productive  resources,  —  is  not  peculiar  to  our  society.  It 
would  be  present  in  the  communistic  society  which  we  imagined 
might  be  formed  if  our  class  were  shipwrecked  on  an  island 
(see  p.  17).  It  was  present  on  the  medieval  manor:  there 
the  apportioning  was  carried  on  largely  by  custom,  —  that  is,  — 
the  habitual  or  customary  things  were  made  or  grown  or  done 
over  and  over  again,  year  in  and  year  out.  The  need  of  appor- 
tionment is  present  even  in  the  case  of  an  isolated  man.  In- 
deed, it  may  help  us  see  more  clearly  the  problem  which  faces 
our  society  if  wo  ask  ourselves  how  the  pioneer  guided  his  ac- 
tivities. Daniel  Boone,  for  example,  gave  part  of  his  time  to 
hunting,  part  to  fishing,  part  to  farming,  part  to  making  new 
tools  or  to  repairing  and  improving  his  old  equipment.  The 
guidance  or  apportionment  of  his  activities  might  be  diagramed 
as  on  the  facing  page. 

This  problem  of  the  guidance  of  economic  activity  was  not 
a  very  difficult  one  under  the  simple  conditions  of  frontier  life. 
Daniel  Boone  did  not  necessarily  give  very  much  conscious 
thought  to  the  apportionment  of  his  productive  resources.  To 
a  considerable  extent  he  did  "  as  the  spirit  moved  him."     When 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         317 


he  did  give  conscious  thought  to  the  problem,  a  rough  and  ready 
solution  was  fairly  quickly  arrived  at.  This  was  true  partly 
because  he  had  only  his  tastes  and  preferences  to  consult ;  and 
so  he  had  only  to  "  know  his  own  mind."  It  was  true  in  part 
because  the  productive  resources  which  were  to  be  apportioned 
were  all  under  his  own  control  (did  not  belong  to  any  one  else) 
and  were  simple,  visible,  tangible,  and  easily  understood.  It 
was  not  hard  for  him  to  see  when  his  weapons  or  tools  were 
wearing  out ;  not  hard  for  him  to  decide  how  much  of  his  re- 
sources should  be  spent  in  maintaining  and  improving  his 
capital  goods  as  opposed  to  how  much  should  be  spent  in  getting 
the  narrow  range  of  consumer's  goods  in  which  he  was  interested  ; 
not  hard  for  him  to  carry  out  his  decisions,  since  he  himself  con- 
trolled all  the  means  of  carrying  them  out. 

Getting  goods  for  imme- 
diate consumption,  which 
had  to  be  apportioned 
among  the  following  :  How 
much  game?  How  much 
corn?  How  much  fish? 
How  much  of  other  things  ? 

Keeping  up  and  improving 
his  productive  resources  so 
as  to  get  consumption  goods 
in  later  years.  This  in- 
volved such  apportionment 
as  the  following :  How  much 
to  building  wagons?  to 
building  bridges?  to  clear- 
ing land?  to  repairing  his 
plow?  to  planning  new 
methods  of  work  ?  to  other 
things  ? 

The  apportionment  of  productive  resources  a  complex  prob- 
lem in  our  society.  —  The  situation  in  our  complex  society  is 
very  different.  In  our  "great  cooperation  "  there  are  hundreds 
of  thousands  of  people  making  use  of  hundreds  of  thousands  of 


Total  amount  of  produc- 

tive   resources    of    the 

pioneer 

—  natural  resources 

—  plow,  wagon,  rifle, 

had  to 

and    other    capital 
goods 

be  ap- 

portioned 

—  labor 

between 

—  acquired  knowledge 

such  as  knowledge 

of  farming  methods, 

etc. 

318  OUR  ECONOMIC   ORGANIZATION 

commodities  and  services.  The  desires  of  these  people  are  con- 
tinually shifting.  We  want  new  things  or  less  of  the  old  ones. 
The  speciaUzed  producer  in  such  a  society,  when  deciding  what 
to  produce,  has  not  the  simple  task  of  "  knowing  his  own  mind," 
but  the  very  difficult  task  of  knowing  the  minds  of  these  thou- 
sands. Furthermore,  the  productive  resources  which  are  to 
be  apportioned  in  our  society  are  not  under  the  control  of  any 
one  person ;  they  are  controlled  or  owned  by  thousands  of  per- 
sons and  of  course  this  complicates  the  problem  of  apportionment. 

Again,  our  productive  resources  are  no  longer  simple  and 
easily  understood.  Modern  technological  industry  uses  very 
complex  instruments  such  as  great  factories,  each  with  scores 
of  departments  and  complex  processes  involving  chemistry, 
physics,  and  other  sciences  which  only  specialized  experts 
can  understand  and  operate.  Then,  too,  the  modern  specialist 
does  his  work  in  a  business  environment  in  which  he  depends 
upon  many  other  specialists  (Study  IX).  He  is  only  one  of 
millions ;  a  decision  of  his  is  only  one  of  billions.  Finally,  he 
is  by  no  means  as  free  to  do  what  he  pleases,  as  was  Daniel  Boone. 
He  operates  in  a  society  which  has  laid  down  rules  of  the  game 
governing  his  actions.  Truly,  a  correct  apportionment  of 
productive  resources  is  a  much  more  complex  task  in  our  society 
than  it  was  with  the  frontiersman. 

We  must  not  get  confused  because  of  the  complexity  of  the 
problem.  It  is  after  all  the  very  same  problem  which  con- 
fronted Daniel  Boone.  In  our  society  it  has  to  l^e  determined 
in  some  way  or  other  (1)  how  much  of  our  available  produc- 
tive resources  shall  be  devoted  to  making  goods  for  immediate 
consumption  ;  (2)  how  much  shall  be  devoted  to  the  making  of 
each  consumption  good  ;  (3)  how  much  shall  be  devoted  to  main- 
taining and  improving  our  productive  resources  ;  (4)  how  much 
shall  be  devoted  to  maintaining  and  improving  each  productive 
resource.  We  must  not  overlook  the  importance  of  maintain- 
ing and  improving  our  productive  resources.  If  we  do  not  take 
care  of  them,  continuous  cropping  may  reduce  the  quality  of 
our  soil  resources ;  our  present  supply  of  tools,  machines,  and 


THE  GUIDANCE   OF  ECONOMIC  ACTIVITY         319 


other  capital  goods  will  certainly  wear  out ;  our  labor  power 
may  easily  become  less  efficient  if  our  workers  are  not  properly 
fed,  clothed,  and  educated ;  our  sum  of  knowledge  may  fail 
to  increase  or  may  even  fall  into  decay.  If  these  things  were 
happening,  we  might  be  able  to  turn  out  as  many  consumers' 
goods  as  formerly  for  a  few  months,  but  in  the  not  distant  future 
their  supply  would  certainly  be  greatly  reduced. 

1.  Getting  goods  (wealth  and 
services)  for  immediate  con- 
sumption. This  involves 
getting  the  "right" 
amounts  of  each  good. 
Descriptively  speaking,  this 
is  done  through  apportion- 
ing society's  productive  re- 
sources among  the  special- 
ized business  units  which  are 
producing  the  various  goods. 
Keeping  up  and  improving 
our  productive  resources  — 
land,  labor,  capital,  and 
organization  —  so  that  we 
must  be  may  have  consumers'  goods 

appor-  in    later    years.     This    in- 

tioned  volves     giving     "correct" 

between  emphasis    to    the    mainte- 

nance and  improvement  of 
each  productive  resource. 
Descriptively  speaking, 
some  of  our  producing  units, 
such  as  an  engine  works,  a 
plow  factory,  or  an  agricul- 
tural college  devote  them- 
selves entirely  to  keeping  up 
and  improving  our  produc- 
tive resources.  Further- 
more, nearly  every  business 
unit  gives  some  attention  to 
the  problem  in  its  "repair, " 
"maintenance,"  and  "bet- 
terment" work. 


Total  amount  of  society's 
productive  resources  at 
a  given  time 

—  natural  resources 

—  capital  goods 

—  labor 

—  acquired  knowledge 


320 


OUR  ECONOMIC   ORGANIZATION 


The  diagram  on  the  preceding  page  sketches  the  character  of 
the  problem  in  our  modern  society.  If  you  will  compare  it  with 
the  diagram  showing  the  problem  which  confronted  Daniel 
Boone,  you  will  find  that  the  two  diagrams  deal  with  exactly 
the  same  things  in  different  words. 

Upon  whom  —  upon  what  agencies  —  do  we  rely  for  the  per- 
formance of  this  stupendous  task  of  guiding  economic  activity ; 
of  apportioning  our  productive  resources?  You  will  not  be 
surprised  to  be  told  that  the  answer  to  this  question,  if  fully 
made,  would  involve  an  analysis  of  the  entire  economic  structure 
of  society.  The  whole  story  cannot  be  told  at  this  time.  It 
can  merely  be  sketched.  The  sketch  can  be  more  easily  un- 
derstood if  you  will  look  through  the  following  diagram,  trying 
at  this  time  merely  to  guess  at  the  meaning  of  the  statements 
you  do  not  understand,  and  then  keep  turning  back  to  the 
diagram  as  the  discussion  proceeds.  By  the  end  of  the  chapter 
the  diagram  will  be  full  of  meaning  to  you. 

r^  .  f  Direct  participation 

Government  r  R  s  1  t  r 

interven-    <  Promotive  action  <  ^     x  -u  ^ 
..  j  I  Contributory 

[  Prohibitive  action 


'  1.  By  collec- 
tive will 


Society's 
resources 
are 

appor- 
tioned ' 


r  Social  atti- 
Social  en-         tudos 
viron-    <  Social  in- 
ment      I       stitu- 

[      tions 


Groups  or  as-  1 

sociations     \  Social  betterment  spirit 
actuated       (  Gain  spirit 
by  J 


Personal  tastes  and  preferences 


2.  Through 

individual  ■ 
initiative 


'Appeal  to 
gain" 


Private  property  gives  command 
(has  authority)   over  social  re- 
sources J 
and 

Competition,  working  through  the 
j  market  and  money  economy, 
[      points  the  way 

'  The  reader  should  notice  that  this  diagram  is  in  part  a  classification  of  agencies  and 
in  part  a  classification  of  motives. 


THE  GUIDANCE   OF  ECONOMIC  ACTIVITY         321 

Collective  will  strong  in  the  guidance  of  economic  activity.  — 

We  have  not  used  the  expression  "  collective  will  "  before,  but 
we  have  used  the  idea  it  contains  many  times.  It  means  merely 
social  control  arising  out  of  the  "  will  "  of  some  group,  whether 
that  group  be  large  or  small.  We  shall  study  social  control 
in  more  detail  in  later  chapters,  but  an  outline  of  the  way  it 
affects  the  apportionment  of  our  productive  resources  must  be 
taken  up  at  this  point. 

In  some  cases  this  collective  will  —  this  social  control  — 
takes  the  form  of  government  intervention  which,  as  shown  in 
the  diagram,  may  mean  (1)  direct  participation,  or  (2)  pro- 
motive action,  or  (3)  prohibitive  action.  Our  various  govern- 
ments, municipal,  state,  and  federal,  participate  directly  in 
economic  activities  —  and,  of  course,  they  use  social  resources 
in  doing  so  —  in  many  ways.  Some  of  our  municipal  govern- 
ments operate  lighting,  water,  and  railway  systems ;  our  states 
have  built  roads,  railroads,  and  canals  ;  our  federal  government 
operates  arsenals  and  navy  yards  and  has  built  the  Panama 
Canal.  These  are  but  a  few  samples  of  direct  governmental 
work  in  want-gratification.  You  may  know  that  there  is  one 
group  of  our  people  —  the  socialists  —  who  think  that  we  should 
have  a  better  economic  system  if  the  government  took  over 
practically  all  production.  Thej^  think  that  the  government 
ought  to  do  much  more  than  it  now  does  of  the  work  of  appor- 
tioning our  productive  resources. 

In  addition  to  direct  participation  in  some  activities,  govern- 
ment promotes  or  encourages  various  others.  Sometimes  it 
does  this  by  contributing  money  to  certain  industries.  Examples 
of  this  are  to  be  found  in  large  payments  for  carrying  mail  as  a 
means  of  developing  shipping  lines,  and  in  bounties,  given  for 
the  production  of  sugar.  More  often,  however,  the  promotive 
action  of  government  takes  the  form  of  regulation.  There  is 
almost  no  end  to  the  illustrations  of  this  kind  of  governmental 
activity.  There  are  tariff  laws  discouraging  the  importation  of 
certain  goods  in  order  to  encourage  their  production  at  home ; 
laws  regulating  the  use  of  mineral  lands  in  our  public  domain ; 


322  OUR   ECONOMIC   ORGANIZATION 

laws  promoting  trade  and  commerce  by  permitting  railroads  and 
other  public  utilities  to  take  private  property  even  when  the 
owner  does  not  wish  them  to  do  so ;  laws  encouraging  the  for- 
mation of  associations  to  develop  foreign  trade ;  laws  showing 
how  contracts  which  have  been  entered  into  may  be  enforced. 
Your  own  information  will  supply  scores  of  other  illustrations, 
and  you  can  readily  see  that  these  laws  greatly  affect  the  develop- 
ment of  enterprises  and  the  apportionment  of  our  productive 
resources  (land,  labor,  capital,  and  acquired  knowledge)  among 
the  enterprises  of  the  community. 

Then,  too,  there  are  cases  of  prohibitive  action  by  govern- 
ments which  distinctly  affect  the  guidance  of  economic  activity 
and  the  use  of  our  resources.  Child  labor  must  not  be  used ; 
women  must  not  work  more  than  a  stated  number  of  hours; 
excessive  rates  of  interest  must  not  be  charged ;  people  must 
not  engage  in  robbery,  in  counterfeiting,  in  gambling,  in  im- 
proper purveying  of  drugs,  in  manufacturing  or  selling  of  al- 
coholic liquors ;  during  a  war  there  must  be  no  trading  with 
the  enemy,  and  no  wasteful  consumption  of  food. 

The  way  our  taxes  are  collected  and  used  frequently  gives 
us  interesting  illustrations  of  prohibitive  and  promotive  ac- 
tivity combined.  Heavy  taxes  may  be  put  on  luxuries  and 
amusements,  and  these  taxes  tend  to  discourage  the  consump- 
tion of  such  goods  and  therefore  tend  to  discourage  having 
society's  resources  used  in  making  them.  The  government 
may  use  the  money  which  comes  in  from  such  taxation  to  make 
contributions  to  other  industries,  or  to  maintain  government 
bureaus  which  carry  on  various  promotive  and  prohibitive 
activities.  Taxation  thus  becomes  an  instrument  for  the  guid- 
ance of  economic  activity. 

As  is  shown  in  our  diagram,  action  by  organized  government 
is  only  one  form  of  collective  action  in  the  guidance  of  economic 
activity.  There  is  also  the  guidance  which  comes  from  social 
attitudes  and  social  institutions  —  constituent  elements  of  our 
social  environment.  "  Social  attitudes  "  is  a  term  covering 
many  things.     For  example,  there  is  public  opinion  concerning 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         323 

the  propriety  of  certain  enterprises.  Some  enterprises  are  "  rep- 
utable," others  are  disreputable.  Men  and  governments  are 
strongly  influenced  by  such  considerations  when  determining 
upon  a  course  of  action.  Then,  too,  there  are  habit  and  custom, 
which  tend  to  cause  men  to  continue  in  enterprises  upon  which 
they  have  once  entered  and  tend  to  cause  productive  resources 
to  be  used  in  habitual  or  customary  ways.  A  certain  method 
of  doing  things  is  "  customary  "  ;  it  is  the  "  usual  way  "  ;  "no 
one  thinks  of  doing  differently  "  and  if  he  does,  he  may  be  re- 
strained by  discontent  among  his  workers  or  his  customers.  In 
South  America,  for  example,  business  negotiations  are  carried 
on  in  leisurely,  ceremonial  ways.  It  would  not  be  profitable 
for  our  merchants  to  try  to  sell  goods  in  South  America  by  the 
use  of  our  more  hurried  North  American  waj^s,  nor  would  it 
be  profitable  for  our  merchants  to  try  to  introduce  South 
American  methods  into  our  country. 

As  examples  of  social  institutions  there  would  occur  to 
every  one  such  things  as  our  banking  system,  our  schools,  our 
libraries,  and  our  churches.  A  business  man  finds  his  actions 
largely  influenced  by  these  and  similar  institutions.  If,  for 
example,  bankers  doubt  the  wisdom  of  a  certain  form  of  business 
enterprise,  that  enterprise  cannot  readily  get  funds.  This  is, 
of  course,  only  another  way  of  saying  that  the  bankers  refuse 
to  encourage  the  movement  of  society's  resources  into  that 
business.  If  our  schools  give  what  is  called  "  trade  education," 
a  skilled  labor  supply  is  more  readily  available  for  manufactur- 
ing. If  the  transportation  system  has  not  been  well  developed, 
the  business  manager  can  move  his  product  but  slowly,  and  will 
be  handicapped  by  that  fact.  If  the  marketing  organization 
of  society  has  not  been  well  worked  out,  he  will  have  difficulty 
in  making  purchases  and  sales. 

All  of  us  know  of  groups  or  associations  (made  up  of  special 
classes  of  persons)  who  play  a  very  important  part  in  determin- 
ing how  our  productive  resources  shall  be  used.  Think,  for 
example,  of  the  American  Federation  of  Labor.  It  adopts 
certain  policies  concerning  hours  of  work  and  other  conditions 


324  OUR   ECONOMIC   ORGANIZATION 

under  which  labor  shall  be  utilized  and  succeeds  in  having  these 
policies  carried  out  by  many  employers.  Think  also  of  our 
scores  of  employers'  associations,  and  hundreds  of  trade  bodies 
that  cooperate  in  developing  markets  (see  p.  298),  in  developing 
better  processes  of  production,  and  in  various  other  forms  of 
guidance  of  our  economic  activity.  Think ,  also,  of  the  numerous 
organizations  which  urge  before  the  public,  before  our  state 
legislatures,  and  before  the  national  congress  such  measures  as 
the  building  of  internal  waterways,  the  restriction  of  immigra- 
tion, food  inspection  laws,  the  development  of  irrigation  projects, 
and  the  suppression  of  vice  and  crime.  In  some  cases  these 
organizations  engage  in  this  work  through  a  desire  to  improve 
the  society  in  which  we  live.  In  other  cases  they  do  it  as  a 
means  of  increasing  the  profits  of  their  members  —  in  other 
words,  they  are  sometimes  actuated  by  the  gain  spirit.  What- 
ever motives  may  influence  them,  these  groups  or  associations 
are  certainly  important  agencies  in  the  apportioning  of  our  pro- 
ductive resources. 

The  guidance  of  economic  activity  largely  left  to  the  indi- 
vidual. —  But  after  all,  our  society,  we  pride  ourselves,  is  one 
which  relies  mainly  on  what  we  call  "  individual  initiative." 
In  the  main  we  have  come  to  believe  that  individuals  and  not 
groups,  and  particularly  not  that  large  group  called  the  state, 
should  be  mainly  responsible  for  the  apportioning  of  our  pro- 
ductive resources  to  want-gratification.  We  have  come  to  feel 
that  collective  action  can  best  be  used  in  those  cases  where  the 
individual  is  not  able  to  act,  or  where  it  will  not  pay  him  to  act, 
and  can  best  be  used  in  developing  an  environment  which  will 
give  the  individual  large  opportunities  to  use  his  powers  in 
the  service  of  society.  This  is  no  place  to  inquire  whether  we 
are  right  or  wrong  in  our  belief  that  so  much  should  be  left  to 
the  individual.  Sipce  we  do  leave  so  much  to  him,  he  becomes 
a  very  important  factor  in  the  guidance  of  our  economic  ac- 
tivity —  in  the  apportioning  of  our  productive  resources. 

There  is  a  very  interesting  scheme  or  instrument  or  device 
of  which  individuals  make  much  use  in  their  guidance  of  eco- 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         325 

nomic  activity.  It  is  the  device  of  private  property.  This  de- 
vice is  itself  a  social  institution  in  the  sense  that  society  sanctions 
it  and,  if  need  be,  enforces  it.  It  is  not  worth  while  for  us  to 
try  to  work  out  a  careful  definition  of  private  property.  In- 
deed, it  has  no  fixed,  unchanging  meaning.  Its  meaning  differs 
among  various  peoples,  and  at  different  periods  in  the  develop- 
ment of  the  same  people.  For  our  purposes  it  is  sufficient  to 
know  that  we  have  to-day,  by  sanction  of  the  society  in  which 
we  live,  such  property  rights  as  those  in  our  labor  power,  and 
may  also  have  property  rights  in  things  lying  outside  our  own 
persons,  such  as  in  land,  buildings,  commodities,  and  in  money 
and  claims  for  money.  If  you  will  think  a  moment,  you  will  see 
that  this  means  that  each  of  us  controls  some  social  energy. 
At  the  very  least  we  control  our  own  work  power.  Some  of  us 
control  land  and  capital  goods  as  well.  Some  of  us  control 
money,  and  this  gives  us  control  of  many  other  things  —  gives 
us  authority  over  them.  It  gives  us  this  authority  in  the  sense 
that  it  enables  us  (by  paying  money)  to  induce  other  people 
to  work  for  us  or  to  let  us  have  the  use  of  their  land  or  the  use 
of  their  capital  goods.  Clearly,  through  the  right  of  private 
property,  the  individual  to-day  has  command  of  social  resources. 
Some  individuals  have  much  wealth  (have  property  rights 
over  many  things  or  much  money)  and  these  have  command 
of  large  quantities  of  our  social  resources ;  other  individuals 
have  command  of  only  small  quantities. 

Private  property  rights,  then,  give  the  individual  power  to 
command  our  social  resources.  What,  now,  induces  or  persuades 
this  individual  to  direct  these  resources  into  some  channels  and 
to  keep  them  out  of  others? 

There  are  many  factors  that  influence  the  individual  in  de- 
ciding what  he  shall  do.  One  of  these  is  personal  taste  or  pref- 
erence. Our  tastes  and  preferences  arise  in  part  out  of  our 
own  natures ;  in  part  they  are  the  results  of  our  social  environ- 
ment, for  we  cannot  help  being  influenced  by  the  attitudes  of 
others  and  the  institutions  (for  example,  schools)  which  sur- 
round us.     No  matter  how   these   preferences  originate,  they 


326  OUR   ECONOMIC   ORGANIZATION 

influence  us  powerfully  in  determining  what  we  shall  do.  Some- 
times they  influence  us  only  in  the  sense  that  they  keep  us  out 
of  certain  occupations  which  would  be  distasteful  to  us,  leaving 
many  other  occupations  open  to  us  among  which  we  make  our 
choice  on  the  basis  of  the  promptings  of  the  gain  spirit  referred 
to  below.  Sometimes  our  tastes  and  preferences  are  more  defi- 
nite and  we  feel  that  there  is  only  one  thing  we  would  be  willing 
to  do,  no  matter  how  many  sacrifices  we  had  to  make.  There 
have  been  thousands  who  have  been  "  driven  "  in  this  way  to 
do  the  work  of  the  artist,  the  teacher,  the  agitator,  the  scientist, 
the  author,  or  the  minister  of  the  gospel. 

But,  after  all,  perhaps  the  strongest  motive  influencing  the 
individual  to-day  is  that  of  gain.  Other  things  being  equal, 
we  do  what  pays  best.  We  take  up  the  specialized  work  that  we 
find  most  profitable.  If  we  own  a  piece  of  land,  we  are  likely  to 
rent  it  or  sell  it  for  the  specialized  purpose  which  offers  us  the 
greatest  gain.  If  we  are  operating  a  steel  mill  or  a  machine 
shop,  we  will  make  the  implements  that  bring  the  greatest  net 
return.  This  explains  how  society's  store  of  raw  materials, 
such  as  timber,  coal,  and  iron  ore,  are  made  into  one  form  of 
capital  goods  rather  than  another.  Business  men  everywhere, 
not  only  the  owners  of  factories,  but  also  the  owners  of 
farms,  stores,  railroads,  mines,  and  all  other  business  enter- 
prises, are  always  trying  to  direct  the  land,  labor,  capital, 
and  organization  which  they  control  into  the  production  of 
goods  which  will  give  them  the  greatest  gains.  They  direct 
productive  energy  into  the  channel  where  greatest  profits  are 
found. 

The  experience  of  a  little  town  in  Ohio  during  the  Great  War  is 
illuminating.  Before  the  war  there  was  but  one  factory  in  this 
town.  This  was  an  automobile  factory  and  nearly  every  worker 
in  the  town  was  employed  there.  The  coal  from  a  near-by 
mine  was  all  used  by  the  same  company.  All  the  steel  and  wood 
and  rubber  that  were  shipped  into  this  town  were  used  to  make 
automobiles.  But  when  the  war  began  a  stranger  moved  to 
the  little  city  and  put  up  a  factory  for  the  manufacture  of  war 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         327 

munitions.  He  did  this  because  the  government  was  offering 
such  high  prices  for  these  munitions  of  war  that  he  felt  certain 
he  could  make  good  profits.  He  accordingly  felt  able  to  offer 
high  wages  to  workers  —  higher  than  the  automobile  manu- 
facturer could  afford  to  pay.  Before  long  nearly  every  man  in 
the  locality  had  left  the  automobile  works  and  was  employed 
in  the  munitions  plant.  These  workers  had  followed  the  lure 
of  the  greatest  gain.  The  owners  of  the  neighboring  coal  mine 
also  found  the  munitions  manufacturer  ready  to  pay  more  than 
they  were  receiving  for  coal.  They  agreed  to  sell  their  whole 
output  to  the  munitions  plant.  A  steel  mill  from  which  the 
automobile  maker  had  been  securing  steel  also  received  a  high 
bid  for  steel  from  the  munitions  maker,  and  as  a  result  their 
output  of  steel  was  soon  diverted  from  the  automobile  shop  to 
the  munitions  plant.  Presently  the  automobile  manufacturer 
closed  his  factor5^  He  could  not  secure  the  men  or  materials 
for  manufacture.  The  social  resources  upon  which  he  had  been 
relying  had  been  drawn  into  another  form  of  production  by  the 
lure  of  greater  gains.  This  case  well  illustrates  what  we  mean 
when  we  say  that  our  productive  resources  are  apportioned 
among  our  various  enterprises  on  the  basis  of  the  comparative 
gains  made  in  those  enterprises. 

The  entrepreneur  bears  risks  and  takes  profits.  —  In  large 
part,  then,  our  productive  resources  are  apportioned  —  our 
economic  activity  is  guided  —  by  individuals  who  command 
society's  resources  and  who  follow  the  lure  of  gain.  Who  are 
these  individuals?  They  are  each  and  every  one  of  us,  for  each 
of  us  apportions  at  least  his  own  work  power.  There  are,  how- 
ever, certain  individuals  who  specialize  in  apportioning  produc- 
tive resources,  who  do  it  on  a  much  larger  scale  than  most  of 
us.  These  persons,  sometimes  called  entrepreneurs  or  enter- 
prisers, are  business  men  who  think  they  see  a  chance  for  gain 
by  engaging  in  certain  businesses,  and  assuming  command, 
through  private  property  rights,  not  only  of  their  own  produc- 
tive resources  but  of  those  of  the  rest  of  us. 

In  effect  such  an  enterpriser  says  to  the  rest  of  us : 


328  OUR  ECONOMIC   ORGANIZATION 

"I  think  I  see  an  opportunity.  Indeed,  I  am  so  sure  of  it,  that  I 
will  place  my  own  wealth  in  the  position  of  first  risk  and  engage  in  this 
enterprise.  I  should  like  some  of  you  to  work  for  me ;  you  need  take 
no  great  risk ;  I  shall  pay  you  a  definite  sum  regularly.  I  should  like 
to  borrow  land  and  capital  goods  from  others  of  you ;  you  also  need 
take  no  great  risk ;  I  shall  pay  you  definite  sums  regularly.  I  myself 
will  be  the  risk  taker  of  this  enterprise.  If  things  go  badly  in  making 
the  goods,  or  if  it  turns  out  that  I  have  made  a  mistake  concerning  the 
existence  of  an  opportunity,  the  rest  of  you  will  not  lose.  As  I  go  along, 
I  shall  pay  wages  to  those  who  work  for  me,  and  those  who  have  loaned 
me  land  or  capital  goods  will  be  safe  because  I  shall  pledge  for  repay- 
ment not  only  the  things  I  have  borrowed  from  you,  but  also  my  own 
property  which  has  been  put  into  the  enterprise.  On  the  other  hand, 
having  taken  the  risk,  I  expect  also  to  take  all  gains  which  may  be  left 
after  I  have  paid  wages,  and  have  paid  for  the  use  of  the  land  and 
capital  goods  and  have  met  other  expenses." 

It  is  hard  to  overestimate  the  importance  of  these  organizers 
of  production,^  no  matter  whether  they  are  operating  stores, 
building  railroads,  running  a  farm,  conducting  a  publishing 
company,  or  operating  a  theater.  Clearly,  if  they  have  real 
vision  and  foresight  with  respect  to  profitable  opportunities ; 
if  they  are  really  able  to  forecast  the  wishes  and  wants  of  society ; 
if  then  they  are  able  to  combine  labor,  capital,  and  land  effec- 
tively, so  as  to  use  social  energy  efficiently,  the  "  right  "  goods 
will  be  abundantly  produced  and  all  of  us  can  get  goods  more 
easily  than  we  could  if  social  energy  were  used  wastefully  and 
inefficiently.  Under  such  circumstances,  the  profits  which 
these  enterprisers  would  make  might  properly  be  regarded  as 
payment  to  them  for  undertaking  the  risks  connected  with  the 
organization  of  specialists  in  our  society.  On  the  other  hand, 
if  they  are  short-sighted  or  use  poor  judgment  in  convei'ting 
social  energy  into  goods,  they  are  likely  to  suffer  a  severe  finan- 
cial loss.  This  fear  whips  many  of  them  to  strenuous  work. 
We  must  not  deceive  ourselves  with  respect  to  the  consequences 
of  a  failure  of  one  of  these  enterprisers.  At  first  glance  we  are 
likely  to  think  that  an  unsuccessful  entrepreneur  loses  money  and 

'  Cf.  Henry  Clay,  Economics  for  the  General  Reader,  American  edition,  Chap.  IH. 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         329 

that  is  the  end  of  the  matter.  By  no  means.  Social  resources 
have  been  misdirected ;  they  have  been  unwisely  used ;  they 
are  no  longer  available  for  wise  use ;  our  wants  will  not  be 
as  fully  gratified  as  they  would  have  been  had  this  failure  not 
occurred. 

The  selection  of  enterprisers.  —  If  we  see  clearly  the  impor- 
tance to  us  of  the  work  done  by  these  business  men,  we  may  well 
wonder  that  we  do  not  appoint  them  with  a  great  deal  of  care. 
As  a  matter  of  fact,  we  allow  almost  any  one  who  desires  to  do  so 
to  become  one  of  these  organizers.  They  are  self-appointed. 
Plainly,  in  a  situation  where  any  one  may  appoint  himself  to 
perform  this  function  many  men  will  appoint  themselves  who 
are  incompetent.  In  other  words,  many  men  will  go  into 
business  who  are  unfitted  to  assume  such  a  responsibility. 
Once  in,  they  cannot  be  removed  excepting  by  themselves  or  by 
failure.  Failure  does  remove  many  of  these  incompetents. 
In  fact,  the  records  of  business  show  that  a  considerable  per- 
centage of  business  men  fail  sooner  or  later,  but,  as  we  have 
seen,  this  failure  usually  injures  not  only  the  organizer,  but 
brings  a  loss  to  society  as  well.  It  is  therefore  a  question 
whether  the  bankruptcy  or  failure  method  is  not  an  unneces- 
sarily expensive  way  of  eliminating  these  inefficient  organizers. 
If  we  so  consider  it,  we  view  it  as  a  disadvantage  of  our  free 
enterprise  method  of  appointing  organizers. 

A  second  disadvantage  in  this  free  enterprise  method  of  pro- 
duction lies  in  the  fact  that  although  all  persons  have  a  legal 
right  to  become  organizers,  not  all  have  an  equal  opportunity  to 
undertake  this  work.  There  are  several  reasons  for  this.  In 
the  first  place,  some  money  is  necessary  to  begin  any  business. 
Therefore,  persons  with  no  monej^,  even  though  able,  have  less 
opportunity  to  become  organizers  than  have  persons  with 
money,  though  possessing  money  is  not  necessarily  a  sign  of 
competence.  Our  system  of  individual  enterprise  merely 
allows  each  individual  to  undertake  this  important  work  of 
organization ;  there  is  little  to  assure  each  individual  that  he 
will  have  sufficient  resources  to  undertake  this  function. 


330  OUR  ECONOMIC   ORGANIZATION 

We  have  seen  enough  of  our  speciaHzed-interdependent- 
cooperative-machine-large-scale  methods  of  production  to  be 
sure  that  one  could  only  hope  to  fail  who  undertook  to  organize 
production  without  being  intelligent  regarding  modern  business. 
Not  all  persons  have  sufficient  opportunity  to  obtain  the  educa- 
tion which  enables  them  to  carry  on  production  with  these 
modern  methods.  Some  persons  who  are  born  the  sons  of  men 
connected  with  large  business  houses  can  obtain  enough  educa- 
tion from  association  with  their  fathers.  Others  must  rely 
almost  entirely  on  what  the  schools  offer  in  the  way  of  such 
education.  At  present  there  is  a  very  limited  amount  of  such 
education  given  in  schools.  Schools  of  commerce  or  of  business 
and  finance  in  colleges  and  universities  are  increasing  in  num- 
ber, and  are  giving  more  and  more  people  an  opportunity  to  be- 
come qualified  for  this  work  of  organizing.  In  the  secondary 
schools  there  is  as  yet  very  little  of  the  type  of  education  which 
is  useful  for  this  purpose.  Our  so-called  "  business  courses  " 
have  in  the  past  done  almost  nothing  but  teach  boys  and  girls 
how  to  do  the  specialized  work  required  of  the  clerks  of  business 
men.  These  courses  have  done  almost  nothing  to  teach  boys 
and  girls  to  become  "  business  men  "  themselves.  Yet  it  is  so 
important  to  society  for  us  to  secure  good  organizers  that  we 
can  only  hope  that  even  secondary  schools  will  increase  the 
studies  which  will  make  it  possible  for  their  graduates  to  under- 
stand how  modern  businesses  are  organized  and  operated. 

Competition  relied  upon  to  secure  good  apportionment.  — 
What  we  have  said  concerning  our  reliance  upon  failure  to  re- 
move incompetent  organizers,  and  upon  success  to  strengthen 
the  hold  of  competent  organizers  is  only  another  way  of  saying 
that  we  rely  upon  competition  to  weed  out  the  poorer  organizers 
and  to  replace  them  with  more  skillful  business  men. 

This  furnishes  us  a  good  opportunity  to  see  something  of  the 
place  of  competition  in  our  industrial  society.  We  rely  upon 
it  to  a  tremendous  extent.  Through  it,  in  the  main,  we  expect 
people  to  find  their  work  in  this  great  social  structure  of  ours ; 
this  is  true  not  merely  of  the  organizers,  but  of  all  the  rest  of 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         331 

us  as  well.  Through  the  success  or  failure  of  enterprisers 
whole  industries  grow  or  wane;  for  example,  success  attracts 
a  horde  of  enterprisers  into  the  automobile  business  and  failure 
pushes  another  horde  out  of  the  bicycle  industry.  The  enter- 
prisers in  one  territory  or  city  find  themselves  advantageously 
located ;  those  in  another  region  are  at  a  disadvantage.  One 
territory  grows,  industrially  speaking ;  the  other  shrinks.  The 
enterprises  using  one  technical  process  forge  to  the  front  and 
displace  those  using  a  less  efficient  process.  Those  using  an 
effective  marketing  arrangement  supplant  those  using  an  in- 
effective one.  In  brief,  through  competition  our  individual 
pursuers  of  gain  find  not  only  their  own  places  in  society,  but 
find  also  the  appropriate  niches  of  our  organization  devices, 
our  marketing  methods,  our  technical  processes,  and  our  pro- 
ducing territories.  It  is  not  surprising  that  writers  repeatedly 
call  our  society  a  competitive  society.  They  mean  that  we 
rely  upon  competition  to  do  many  of  the  things  which  are  per- 
formed in  other  societies  by  caste  systems,  heredity,  and  the 
grip  of  custom. 

PROBLEMS 

1.  Be  ready  to  explain  what  is  meant  by  the  apportionment 
function. 

2.  Explain  how  custom  played  a  large  part  in  the  apportionment  of 
social  resources  on  the  manor. 

3.  Did  Robinson  Crusoe  find  it  necessary  to  perform  the  function 
of  apportionment?  How  would  he  determine  how  much  of  his  avail- 
able energy  to  put  to  each  task  ? 

4.  Why  is  it  desirable  that  we  apportion  some  of  our  social  energy 
to  keeping  up  our  supply  of  land,  labor  power,  capital,  and  methods  ? 

5.  In  1917,  Jolm  Smith  went  into  the  business  of  manufacturing 
shoes.  An  economist  who  was  a  friend  of  his  said  to  him,  "It  is  your 
guess  that  society  desires  some  of  its  social  energy  apportioned  to 
shoes."     Can  you  explain  what  the  economist  meant? 

6.  A  man  riding  on  a  train  recently  observed  a  large  factory  which 
had  been  closed  down  because  it  could  not  sell  the  goods  it  produced. 
"Ah,"  said  he,  "some  one  has  guessed  wrongly  as  to  how  society 


332  OUR  ECONOMIC   ORGANIZATION 

desired  its  productive  energy  to  be  apportioned."     Can  you  explain 
what  he  meant? 

7.  It  is  the  hope  of  profits  that  induces  the  organizer  to  do  his  best 
in  calculating  the  demands  of  society  for  economic  goods.  In  Schenec- 
tady, N.  Y.,  is  one  plant  of  the  American  Locomotive  Company. 
This  factory  does  not  make  consumers'  goods,  but  makes  capital. 
What  induced  the  organizer  of  the  plant  to  go  into  this  business  ? 

8.  Society  depends  for  its  supply  of  capital  —  macliines  and  the 
like  —  upon  the  estimates  or  guesses  of  organizers  as  to  the  amount 
which  it  will  be  profitable  to  make.     Explain. 

9.  Mention  cases  other  than  those  in  the  text  where  government 
apportions  productive  energy  (a)  by  direct  participation,  (6)  by  pro- 
motive action,  (c)  by  prohibitive  action. 

10.  Suppose  that  a  county  builds  a  courthouse.  Is  there  apportion- 
ment of  productive  energy?     How  does  the  county  get  the  funds? 

11.  What  is  meant  by  referring  to  taxation  as  a  means  of  social 
control  ? 

12.  Mention  cases  other  than  those  in  the  text  where  social  environ- 
ment plays  a  part  in  the  apportionment  of  productive  energy.  Does 
it  ever  play  a  part  in  determining  your  own  actions?  Did  it  play 
a  part  in  the  apportionment  of  productive  energy  on  the  medieval 
manor  ? 

13.  Make  as  long  a  list  as  you  can  of  the  ways  in  which  schools 
affect  the  apportionment  of  productive  energy.  Do  the  same  for 
churches. 

14.  Does  the  social  institution  which  we  call  the  family  play  a  part 
in  the  apportionment  of  productive  energy? 

15.  The  United  States  Government  guaranteed  farmers  about  $2  per 
bushel  for  wheat  raised  in  1918.  The  purpose  of  this  high  price  was  to 
make  sure  that  the  farmers  would  attempt  to  raise  large  crops.  ^Vhy 
should  a  large  crop  be  the  result? 

16.  "  If  the  wheat  crop  of  the  world  should  fall  off  one-half  next 
year  and  prices  were  not  fixed  by  the  government,  a  rise  in  price 
would  be  of  great  social  advantage."     Explain  why. 

17.  Demand  of  consumers  is  the  main  motive  power  in  the  industrial 
system.  We  express  our  demands  in  terms  of  price  and  thus  guide  the 
producer.     Explain. 


THE  GUIDANCE  OF  ECONOMIC  ACTIVITY         333 

18.  When  the  United  States  entered  the  Great  War,  millions  of  men 
were  conscripted  for  the  army.  Was  this  a  method  of  apportioning 
productive  energy  to  war  uses  ? 

19.  When  the  United  States  entered  the  Great  War,  billions  of 
dollars  were  raised  by  taxes  and  by  the  sale  of  bonds.  With  this 
money  the  government  hired  productive  energy  to  make  war  goods. 
Was  this  a  method  of  apportioning  productive  energy  to  war  uses? 

20.  A  certain  man,  during  the  period  of  the  war,  purchased  two 
new  pleasure  automobiles.  A  friend  said  to  him,  "You  are  bidding 
against  the  government  for  productive  energy.  If  you  buy  auto- 
mobiles, the  government  will  have  greater  difficulty  in  securing  men 
and  materials  for  munitions."     Was  the  friend  right  or  wrong? 

21.  A  great  number  of  people,  especially  at  the  outbreak  of  the  war, 
said :  "We  must  have  business  as  usual;  that  is,  people  must  buy  as 
many  goods  as  they  have  bought  before  the  war."  If  business  was 
carried  on  as  usual,  where  could  the  government  secure  the  productive 
energy  to  make  cannon,  shells,  ships,  aeroplanes,  and  other  war 
munitions  ? 

22.  "The  seat  of  authority  is  private  property."  Explain.  Do  you 
agree  ? 

23.  "We  do  what  pays  best."  Does  this  statement  require  any 
qualifications  ? 

24.  "Price  levels  and  profit  margins  send  productive  energy  into 
industry  x  rather  than  into  industry  y."  Show  how.  Is  any  other 
method  possible? 

25.  How  does  the  business  organizer  induce  labor  power  to  produce 
the  goods  which  he  has  decided  society  demands  ? 

26.  Rent  is  the  payment  which  the  organizer  makes  to  the  owner  of 
land  in  return  for  its  services.  Interest  is  the  payment  which  the 
organizer  makes  for  funds  to  secure  their  services  to  aid  him.  Are  these 
statements  true  ? 

27.  Rent,  interest,  and  wages  are  devices  which  make  it  possible 
for  the  organizer  to  draw  productive  energy  into  making  the  goods 
which  he  desires  to  make.  Wliat  form  of  productive  energy  does  he 
draw  with  each? 

28.  We  give  individual  organizers  an  opportunity  to  apportion 
productive  energy  to  the  making  of  the  goods  we  want.     Do  wc  reward 


334  OUR   ECONOMIC   ORGANIZATION 

them  if  they  are  successful?    If  so,  how?    Are  they  punished  if  they 
are  unsuccessful  ?    If  so,  how  ? 

29.  Suppose  that  we  put  all  the  business  of  our  country  in  the 
hands  of  one  man,  and  gave  him  absolute  authority  to  do  whatever  he 
pleased.  Would  it  be  desirable  for  him  to  apportion  productive  energy 
to  producing  different  forms  of  goods  ?  Would  it  be  desirable  for  him 
to  apportion  some  productive  energy  to  the  production  of  new  capital  ? 
Can  you  see  any  way  in  which  he  could  determine  how  much  of  each 
kind  of  goods  to  produce  ? 

30.  Are  there  any  courses  in  your  school  designed  to  aid  in  the 
development  of  good  business  managers?  How  do  you  define  a 
"good"  business  manager? 

31 .  "  Competition  detennines  who  and  what  is  fit ;  it  tries  the  avail- 
able pegs  in  the  available  holes  and  uses  the  ones  that  go  in  best." 
If  so,  how? 

32.  "Competition  determines  what  firm  shall  survive  within  an:in- 
dustry."     Just  how? 

33.  "Competition  determines  what  industrial  methods  shall 
survive."     Show  how. 

34.  "Competition  determines  what  marketing  methods  shall 
survive."     How?     Can  you  cite  instances ? 

35.  Draw  up  an  outhne  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  824-828,  Selections 
No.  100-112,  320-331 ;  pp.  885-890,  Selections  No.  336-361 ;  pp.  947- 
950,  Selections  No.  362-377. 

Bureau  of  Education,  Lessons  in  Community  and  National  Life : 
Series  B,  Lesson  B-22,  Millis,  "  Financing  the  War." 

At  the  option  of  the  teacher,  additional  lessons  may  be  given  on 
competition  and  private  property  from  the  references  in  Readings  in 
Industrial  Society. 


STUDY   XIX 

THE  WORK   OF   MONEY   IN   ECONOMIC   ORGANIZATION 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  how  money  facilitates  the  apportionment  of  our  productive 

resources. 

2.  To  get  a  view  of  the  other  services  rendered  by  money. 

3.  To  secure  an  understanding  of  the  constituent  parts  of  a  monetary 

system. 

4.  To  learn  the  characteristics  of  "  good  "  money. 

Apportionment  is  based  upon  comparisons.  —  If  we  think  back 
over  the  various  aspects  of  the  apportionment  of  our  productive 
resources  as  this  has  been  discussed  in  Study  XVIII,  we 
reahze  that  a  sound  judgment  concerning  "  right  "  or  "  correct  " 
apportionment  can  be  reached  only  on  the  basis  of  a  series  of 
comparisons  concerning  the  relative  importance  of  various 
activities  and  goods. 

Ought  we  to  have  more  shoes  and  fewer  books,  or  ought  we  to 
have  more  of  both  shoes  and  books  and  fewer  potatoes?  Or 
ought  we  to  have  more  of  all  these  and  fewer  lawyers'  services  ? 
Is  it  more  important  to  have  many  consumers'  goods  this  year  or 
to  have  many  consumers'  goods  in  later  years  by  devoting  much 
of  this  year's  productive  resources  to  enlarging  our  supply  of 
producers'  goods  ?  Is  it  more  important  to  improve  our  land  re- 
sources or  to  enlarge  our  stock  of  capital  goods,  or  to  increase 
the  efficiency  of  labor?  Shall  we  gain  in  want-gratification  by 
having  the  government  tax  certain  industries  heavily  and  use 
this  money  to  pay  subsidies  to  other  industries?  How  much 
worth  while  are  the  services  of  certain  government  bureaus  as 
compared  with  the  taxes  we  have  to  pay  to  support  them? 
There  are  literally  billions  of  such  comparisons  to  be  made. 

335 


336  OUR  ECONOMIC   ORGANIZATION 

Measuring  sticks  are  used  in  these  comparisons.  —  It  is 
clear  that  in  making  such  comparisons  we  need  some  measuring 
sticks,  —  sticks  which  can  be  used  for  determining  the  relative 
importance  of  such  varied  things  as  olives,  baseball  bats,  cigars, 
threshing  machines,  lawyers'  services,  government  bureaus,  and 
the  services  of  a  collector  of  butterflies ;  which  can  be  used  to 
determine  the  relative  importance  of  consumers'  goods  now  in 
existence  as  compared  with  consumers'  goods  of  the  future; 
which  can  be  used  by  the  business  manager  to  tell  whether 
more  of  this  productive  resource,  and  less  of  that  productive 
resource  would  be  wise  in  his  business ;  which  can  be  used,  in 
brief,  as  guides  in  the  apportionment  of  the  productive  resources 
of  society. 

As  a  matter  of  fact  we  do  have  such  measuring  sticks.  Some 
of  them  are  very  hard  to  describe  in  any  clear  way.  For 
example,  the  existence  of  certain  "  moral  standards  "  in  the 
community  may  be  the  measuring  stick  which  the  "  collective 
will  "  (see  p.  320)  uses  in  deciding  to  encourage  one  enterprise 
and  to  frown  upon  another,  but  it  would  not  be  easy  to  describe 
these  standards  in  detail,  or  to  tell  whence  they  come.  All  of 
us  would  be  clear,  however,  that  they  are  very  important. 

The  particular  measuring  stick  we  are  to  examine  in  this 
chapter  is  the  money  unit  and  we  shall  study  it  far  enough  to  see 
it  operating  in  the  so-called  "  price  system  "  of  modern  society. 
We  shall  see  that  it  is  not  a  perfect  measuring  stick.  It  is, 
however,  one  which  we  use  a  great  deal,  and  it  is  worth  our 
while  to  understand  it. 

We  have  already  caught  a  glimpse  of  some  things  done  by 
money  economy  and  the  price  system  (see  p.  199)  in  our  discus- 
sion of  the  use  of  money  to  facilitate  exchange  by  overcoming 
the  difficulties  connected  with  the  double  coincidence  of  barter. 
In  this  chapter  we  shall  again  take  up  the  study  of  money. 
Our  immediate  purpose  will  be  that  of  seeing  how  it  helps  us 
calculate  concerning  desirable  courses  of  action,  but  we  shall 
take  this  opportunity  to  look  also  at  its  other  uses  or  functions 
and  shall  discuss  what  constitutes  a  good  or  satisfactory  money. 


WORK   OF   MONEY   IN   ECONOMIC   ORGANIZATION    337 

Money  is  a  medium  of  exchange.  —  Perhaps  the  uses  of 
money  with  which  we  are  most  familiar  are  those  which  are 
common  in  family  Hfe.  The  family  uses  money  continually 
in  buying  the  goods  it  uses  or  consumes.  A  comfortable  home 
can  be  rented  or  purchased  with  money.  The  butcher  and 
grocer  are  glad  to  fill  the  larder  with  edibles  in  exchange  for  it. 
The  owner  of  the  clothing  store  provides  clothing  for  the  family 
that  has  money  to  offer  him.  A  doctor's  services  can  be  em- 
ployed, theater  tickets  can  be  obtained,  books  can  be  provided, 
and  travel  is  possible  for  the  family  with  money  to  exchange  for 
the  enjoyment  of  these  things.  All  the  uses  of  money  mentioned 
in  this  paragraph  have  illustrated  its  use  as  a  means  of  exchange. 
In  earlier  chapters  we  have  seen  many  other  illustrations  of  this 
same  use  or  function  of  money. 

Money  is  used  as  a  standard  of  deferred  payments.  —  A 
second  use  which  the  family  makes  of  money  is  in  saving ;  as, 
for  example,  to  build  a  house,  or  for  a  "  rainy  day,"  or  for  old 
age.  It  is,  of  course,  conceivable  that  this  saving  might  take 
the  form  of  storing  up  supplies  of  various  sorts,  but  in  practice 
the  modern  family  seldom  does  this.  It  "  saves  money." 
Even  in  saving  money  the  modern  family  does  not  hoard  it  — 
does  not  hide  it  until  the  time  has  come  to  use  it.  It  deposits 
it  in  a  savings  banks.  We  shall  see  later  how  the  savings  bank 
uses  this  money.  For  the  present  we  need  only  notice  that 
the  bank  repays,  together  with  interest,  the  sums  deposited  in 
it  by  those  who  have  done  the  saving.  This  illustrates  the  use 
of  money  as  a  "  standard  of  deferred  payments."  Another 
common  case  is  seen  when  money  is  borrowed,  to  be  returned 
later.     Other  illustrations  are  plentiful. 

Money  is  used  as  a  measuring  stick.  —  Now  notice  that  the 
unit  of  money  —  it  is  the  dollar  unit  in  the  United  States,  the 
pound  sterling  in  England,  and  the  franc  in  France  —  helps  the 
family  to  calculate ;  helps  it  to  make  comparisons ;  helps  it  to 
choose  what  to  buy  from  among  the  many  goods  it  might  buy. 
Suppose  the  family  is  deciding  whether  to  buy  a  new  piano  or 
new  rug.     As  soon  as  it  learns  that  the  piano  will  cost  much 


338  OUR  ECONOMIC   ORGANIZATION 

more  than  the  rug,  it  becomes  clear  that  if  the  rug  is  chosen, 
many  additional  things  can  be  bought.  Thus  the  dollar  unit 
is  a  sort  of  measuring  stick  which  enables  us  more  quickly  and 
easily  to  decide  on  courses  of  action.  If  the  family  income  is 
$150  a  month,  and  the  family  is  spending  $35  for  rent, 
not  more  than  $115  are  available  for  food,  clothing,  light, 
heat,  savings,  and  miscellaneous  expenses.  If  the  family  in- 
come is  increased  or  reduced,  it  is  easy  to  calculate  what  this 
change  means  in  the  family  expenditures  and  to  apportion 
the  new  sum  to  the  various  uses.  Thus  by  computing  its  ex- 
penses and  its  income  in  dollar  terms  —  sometimes  this  is  called 
making  a  budget  —  the  family  is  able  to  organize  or  adjust 
its  expenses  to  fit  its  income.  It  would  be  hard  indeed  for  the 
family  to  plan  and  organize  its  expenditures  and  savings  if  it 
had  no  unit  in  which  calculations  could  be  made. 

Business  men  use  money  in  all  these  ways.  —  The  dollar 
unit  renders  similar  services  to  the  business  man.  A  farmer,  for 
instance,  uses  money  to  buy  or  rent  his  land,  to  stock  his  farm 
with  horses,  cattle,  swine,  and  sheep,  to  buy  farm  machinery, 
and  to  hire  men  to  work  for  him.  He  sells  his  produce  for  money. 
The  merchant  uses  money  to  rent  a  store  and  to  fill  its  shelves 
with  merchandise.  With  it  he  employs  clerks,  buys  advertising 
space  in  periodicals,  and  pays  the  bills  which  are  sent  him  for 
lighting  and  heating  his  place  of  business.  Of  course,  he  also 
sells  his  goods  for  money.  The  same  story  could  be  told  of 
all  our  modern  specialized  producers.  Indeed,  we  have  already 
seen  this  situation  in  our  discussion  of  the  cooperation  of  special- 
ists (see  Studies  IX-XII). 

So  also  the  business  man  makes  much  use  of  money  in  de- 
ferred payments.  While  full  discussion  of  the  matter  must 
come  later,  we  already  know  much  business  is  done  "  on  credit." 
Persons  buy  of  the  butcher,  the  baker,  the  candlestick  maker 
and  "  charge  "  the  purchases,  making  payment  at  the  end  of 
the  month.  Business  men  buy  and  sell  "  on  30  (or  60,  or  90) 
days'  time,"  the  goods  being  delivered  at  once,  and  payment 
being  made  at  the  time  stated.     Business  men  borrow  from  the 


WORK   OF   MONEY   IN   ECONOMIC   ORGANIZATION     339 

bank,  for  short  periods,  on  various  kinds  of  "  promises  to  pay," 
and  from  banks  and  others  for  long  periods  by  "  issuing  bonds." 
Few  things  are  more  common  than  deferred  payments. 

Business  men  also  find  the  pecuniary  unit  indispensable  in 
calculating,  comparing  courses  of  action,  and  making  plans. 
A  farmer,  for  instance,  is  deciding  whether  to  raise  corn  or  wheat 
on  a  certain  field.  He  knows,  for  example,  that  for  the  same 
cost  he  can  raise  about  60  bushels  of  corn  on  each  acre,  or  about 
30  bushels  of  wheat.  Will  he  decide  to  raise  corn  because  corn 
will  give  him  a  greater  yield  in  bushels?  No,  he  will  calculate 
the  number  of  dollars  for  which  each  crop  can  be  sold  and  let 
that  be  his  guide.  If  corn  sells  for  75  cents  a  bushel,  and  wheat 
for  S2.25  a  bushel,  it  will  be  more  profitable  to  raise  wheat  even 
though  the  number  of  bushels  raised  is  far  less,  provided  that 
the  total  costs  are  the  same  in  the  two  cases.  Again,  by 
comparing  the  cost  of  hiring  men,  and  the  cost  of  a  new  labor- 
saving  machine,  he  can  decide  which  form  of  productive  re- 
source it  will  be  more  profitable  for  him  to  use.  The  money 
unit  thus  serves  the  farmer  as  a  sort  of  measuring  stick  in  decid- 
ing what  crops  to  raise,  and  what  forms  of  productive  energy 
to  make  use  of. 

The  measuring  stick  and  apportionment.  —  All  other  business 
men  find  the  pecuniary  unit  a  great  assistance  in  making  calcu- 
lations concerning  their  business;  in  making  comparisons  con- 
cerning different  courses  of  action.  One  of  the  decisions  which 
a  manufacturer  is  constantly  called  on  to  make  is  whether  he 
shall  hire  men  or  buy  machines  to  do  certain  kinds  of  work.  A 
certain  manufacturer  was  making  shoes,  the  leather  for  which 
could  be  cut  out  either  by  men  or  by  machinery.  His  problem 
was  to  find  out  which  was  the  better  method.  The  machine 
would  work  faster  but  would  cost  a  great  deal  of  money.  The 
manufacturer  learned,  however,  that  such  a  machine  would 
cut  the  leather  for  a  million  shoes  before  wearing  out.  The  cost 
of  the  machine  was  $1000.  When  he  compared  this,  plus  its 
incidental  cost  for  power,  etc.,  with  the  number  of  dollars  that 
it  would  take  to  have  leather  for  a  million  shoes  cut  out  by  hand, 


340  OUR  ECONOMIC   ORGANIZATION 

he  found  it  easy  to  reach  a  decision.  In  such  ways  manu- 
facturers are  continually  using  our  unit  of  money  as  a  measure 
with  which  they  can  plan  the  least  expensive  methods  of  pro- 
ducing goods ;  they  are  continually  using  it  to  plan  the  appor- 
tionment of  productive  resources  within  their  plants. 

The  family  and  the  business  man  are  by  no  means  the  only 
parts  of  our  society  which  use  the  pecuniary  unit  to  facilitate 
calculations  —  as  a  means  of  measuring  the  relative  worth 
or  significance  of  different  things  or  of  different  courses  of 
action.  A  laborer  who  is  seeking  work  makes  use  of  the  dollar 
unit  in  this  way.  If  two  jobs  are  offered  him  one  of  which  is 
no  more  difficult  or  distasteful  than  the  other,  he  is  almost 
certain  to  accept  the  task  which  gives  him  the  greater  number 
of  dollars.  The  owner  of  land,  other  things  being  equal, 
will  rent  or  sell  his  land  to  the  person  who  is  able  to  bid  highest. 
The  owner  of  money  commonly  decides  the  use  to  which  his 
money  shall  be  put  on  the  basis  of  the  best  offer  for  its  services. 
To  a  large  extent  all  of  us  plan  our  actions  by  calculating  in 
terms  of  our  pecuniary  unit  —  the  dollar.  Even  government 
which  is  able  to  apportion  productive  resources  by  authority 
must  always  estimate  the  cost  of  its  activities  and  then  estimate 
the  revenue  which  must  be  brought  in  from  various  sources  in 
order  to  meet  this  cost. 

One  aspect  of  the  use  of  the  money  unit  as  a  measuring  stick 
is  particularly  important  in  connection  with  our  present  study. 
As  we  have  many  times  seen,  an  outstanding  purpose  of 
economic  activity  is  want-gratification.  What  wants?  What 
ones  are  most  pressing?  The  money  unit  furnishes  us  a  lan- 
guage which  we  can  use  very  effectively  in  telling  enterprisers 
the  wants  we  regard  as  most  important.  If,  when  you  or  I 
wanted  two  different  things,  we  could  only  say,  "  1  want  one  a 
great  deal,  and  I  want  the  other  very  much,"  no  business  man 
could  tell  which  it  would  pay  best  to  produce  for  us.  But  in 
pecuniary  terms  we  can  express  ourselves  so  that  every  one  will 
understand.  If  we  say,  "  I  will  give  two  dollars  for  one  article, 
and    three   dollars   for    the    other,"    entrepreneurs    can    then 


WORK   OF  MONEY   IN   ECONOMIC   ORGANIZATION    341 

calculate  what  it  will  cost  to  make  each  article,  and  can  know 
which  one  it  will  be  most  profitable  for  them  to  produce.  If 
our  desire  for  one  of  these  articles  should  increase  so  much 
that  we  would  be  willing  to  pay  three  or  four  times  as  much 
as  it  would  cost  to  produce  it,  it  is  highly  probable  that  a  horde 
of  enterprisers  would  be  eager  to  produce  this  commodity  if 
they  thought  that  our  attitude  was  typical  of  that  of  the  rest 
of  society. 

Clearly,  when  we  express  the  strength  of  our  demand  in 
prices,  the  business  man,  the  organizer,  has  a  guide.  Every 
farmer,  for  example,  can  tell  by  the  number  of  dollars  that  are 
offered  per  bushel  just  how  strongly  people  are  demanding 
wheat  as  compared  with  corn  and  other  grains.  The  grains 
that  are  demanded  most  loudly  in  our  language  of  prices  as 
compared  with  the  cost  of  producing  them  will  be  the  ones  that 
the  farmer  will  raise.  Merchants,  manufacturers,  and  all 
other  business  organizers  heed  the  same  voice.  All  understand 
the  demand  expressed  in  our  language  of  dollars  and  then  try  to 
estimate  or  calculate  what  wants  it  will  be  most  profitable  to 
gratify.  So  true  is  this  that  some  writers  speak  of  the  consumer 
as  being  the  person  who  really  guides  our  economic  activity  — 
who  really  determines  how  our  productive  resources  shall  be 
apportioned  —  since  producers  so  anxiously  await  his  wishes. 
"  Await  "  is  not  always  the  right  word.  Quite  frequently 
producers  anticipate  the  wants  of  consumers  and  even  cause 
these  wants  to  move  in  certain  directions  by  extensive  adver- 
tising. This,  by  the  way,  explains  why  advertising  and 
advertising  agencies  are  sometimes  spoken  of  as  important 
factors  in  the  apportionment  of  our  economic  activity. 

Money  performs  very  useful  functions  in  our  society.  — 
A  summary  statement  of  the  functions  of  money  in  modern 
industrial  society  might  readily  and  accurately  be  made  in 
terms  of  the  topic  headings  of  the  chapter  up  to  this  point.  It 
will  be  worth  while  to  review  them  with  this  purpose  in  mind. 
It  will  be  helpful,  also,  to  look  at  another  statement  of  the  work 
of  money  which,  while  covering  the  same  fundamental  points, 


342  OUR  ECONOMIC   ORGANIZATION 

is  stated  in  somewhat  different  language.  One  writer  '  cites 
the  following  tasks  (among  others)  which  arc  performed  by- 
money  in  economic  organization.  You  will  find  them  self- 
explanatory. 

(1)  It  facilitates  economic  calculation. 

(2)  It  permits  the  organization  of  consumption.  The  consumer 
can  use  his  money  income  ("generalized  purcha.sing  power")  in  any 
proportion  he  chooses  among  the  various  goods  available.  He  can 
organize  his  consumption  into  a  balanced  whole,  using  the  goods  of 
the  entire  world.  He  could  not  do  this  so  readily  without  a  calculating 
device  and  without  a  medium  of  exchange  which  does  away  with  the 
"double  coincidence  of  barter." 

(3)  It  permits  the  organization  of  production,  not  only  by  making 
it  easier  to  apportion  productive  resources  among  the  multitudinous 
plants,  but  also  by  facihtating  apportionment  within  a  given  plant. 
Costs  and  proper  proportions  of  factors  of  production  can  be  gauged 
and  courses  of  action  determined  upon. 

(4)  It  articulates  productive  and  consumptive  activities  into  an 
organic  system.  Through  price  changes  producers  are  induced  to 
make  available  the  goods  desired  by  consumers.  The  productive 
mechanism  shifts  to  meet  shifts  in  wants. 

You  will  not  be  confused  by  the  personalizing  of  money  in  the 
foregoing  statement.  Money  does  not  itself  do  these  things ; 
it  is  used  by  persons  as  a  means  —  and  not  necessarily  the  sole 
means  —  of  doing  these  things. 

What  is  money  ?  —  Money  has  been  shown  to  play  such  an 
important  part  in  our  economic  organization  that  our  interest 
ought  to  be  aroused  in  finding  out  just  what  money  is.  There 
is  nothing  very  mysterious  about  it.  Thousands  of  years  ago 
the  need  of  some  sort  of  measuring  stick  or  language  device, 
added  to  the  need  of  finding  some  way  of  avoiding  the  diffi- 
culties connected  with  the  double  coincidence  of  barter,  resulted 
in  some  one  good  or  commodity  being  taken  as  a  standard  or 
basis  of  comparison  and  then  used  as  a  medium  of  exchange. 
Dozens  of  different  commodities  have  at  one  time  or  another, 

»  W.  H.  Hamilton,   "The  R61e  of  Money  in  Economic  Organization,"   in  Moulton'a 

Money  and  Bankiny,  Pt.  1.  pp.  39-44. 


WORK   OF   MONEY   IN   ECONOMIC   ORGANIZATION    343 

and  among  one  people  or  another,  been  used  for  these  purposes. 
Furs  or  skins  were  so  employed  in  many  ancient  nations,  and, 
indeed,  are  used  for  this  purpose  to-day;  our  Indians  used 
wampum  or  bead  currency  ;  leather  money  has  frequently  been 
used ;  sheep  and  cattle  have  constituted  currency  among 
pastoral  peoples ;  slaves,  tobacco,  salt,  paper,  iron,  gold,  silver, 
grain,  have  all  been  thus  used. 

As  time  has  gone  on,  however,  gold  has  come  to  be  more 
and  more  used  by  civilized  nations  as  their  "  money  metal  " 
and  we,  in  the  United  States,  have  the  gold  "  dollar  "  as  our 
monetary  unit.  What  is  this  money  unit?  What  is  this 
dollar?  Here,  also,  there  is  no  mystery.  The  dollar  is  merely 
a  lump  of  gold  of  a  certain  weight  (25.8  grains)  and  fineness 
(nine  tenths  gold  and  one  tenth  copper  alloy).  This  standard 
was  set,  by  law,  by  our  Congress  and  is  entirely  similar  to  other 
standards  of  weights  and  measures,  such  as  60  pounds  of  wheat 
constituting  a  bushel  and  8.33  pounds  of  water  a  gallon.  We 
are  not  here  concerned  how  it  came  to  be  called  the  dollar 
(would  it  have  made  any  difference  if  it  had  been  called  a 
squeegee?)  nor  how  Congress  came  to  set  the  standards  of 
weight  and  fineness  it  did  set.  All  we  need  to  remember  is 
that  the  gold  dollar  ^  is  just  a  lump  of  gold. 

The  fact  that  multiples  of  the  gold  dollar  are  "coined"  does 
not  change  them  from  being  lumps  of  gold.  Our  government, 
through  its  mints,  will  take  gold  brought  to  it  in  sufficient 
quantities  by  any  one,  turn  it  into  coins,  and  return  the  coins 
to  the  owner.  The  people  can  then  use  these  coined  lumps  of 
gold  with  entire  confidence  that  they  have  a  certain  weight  and 
fineness  and  thus  the  use  of  scales  and  testing  devices  (which 
would  be  necessary  if  the  lumps  were  uncoined)  is  not  necessary 
in  trade.  The  "  milled  "  edges  and  stamped  faces  of  the  coins 
make  it  difficult  for  any  criminally  inclined  person  to  take 
metal  out  of  these  coins  without  detection  and  so  they  keep 

•  The  gold  dollar  is  not  itaelf  coined.  It  would  be  too  small  for  convenience  in  circula- 
tion. We  call  the  gold  dollar  and  also  the  mill  "money  of  account,"  meaning  that  they 
are  used  in  computations,  but  arc  not  coined  for  use  in  exchanges. 


344  OUR  ECONOMIC   ORGANIZATION 

their  weight  except  for  incidental  wear.  The  government 
keeps  a  monopoly  of  coinage,  not  because  it  makes  any  profit 
from  running  the  mint,  but  because  it  would  be  unfortunate 
for  our  economic  affairs  to  have  more  than  one  standard  or 
pecuniary  unit,  and  we  should  certainly  have  many  and  varying 
standards  if  any  person  who  chose  to  do  so  could  coin  money  of 
any  weight  and  fineness  he  liked. 

Representatives  of  the  money  unit.  —  The  gold  dollar  is 
then  our  standard  ;  our  unit  of  measurement.  Since,  however, 
some  business  transactions  involve  very  small  amounts  and 
others  involve  quite  large  amounts,  we  have  found  it  convenient 
to  make  available  for  use  multiples  of  the  dollar  and  fractional 
parts  of  the  dollar.  Then,  too,  since  even  gold  is  awkward  to 
handle,  we  have  developed  a  system  of  paper  representatives 
redeemable  in  coin  upon  demand.  Sometimes  these  paper 
representatives  are  issued  by  the  government ;  sometimes 
they  are  issued  by  private  institutions  (banks),  —  generally 
under  some  kind  of  government  supervision.  In  the  United 
States,  as  in  most  other  nations,  the  kinds  of  money  we  have 
in  use  are  largely  the  result  of  historical  growth  and  cannot 
always  be  described  as  a  logical  arrangement.  We  do  not 
need  to  know  all  the  details  about  the  different  kinds  of  money 
in  order  to  understand  what  work  money  does  in  modern  society, 
but  you  will  be  interested  in  the  following  outline  of  the  kinds 
of  money  in  the  United  States  to-day.  All  except  those  marked 
by  an  asterisk  (*)  are  issued  by  the  government.  Those  so 
marked  are  issued  by  our  banking  system  under  government 
supervision.  Directly  or  indirectly  all  forms  are  redeemable 
in  gold  coin,  for  the  gold  dollar  is  our  basic  unit.  "  Redeem- 
able "  means  that  the  government,  in  order  that  there  may  be  no 
doubt  about  the  worth  of  representative  money,  will  give  the 
bearer  gold  in  exchange  for  representative  money  if  he  so  desires. 
In  the  same  effort  to  maintain  a  sound  money  system  the 
government  will  redeem  in  full-weight  coins  gold  coins  which 
have  become  light  through  wear,  provided  the  wear  has  not 
been  allowed  to  go  too  far. 


WORK  OF  MONEY  IN  ECONOMIC  ORGANIZATION      345 


Kinds  of  Money  in  the  United  States  To-day 


1.  Different  denominations  of 
the  basic  unit,  that  is,  the 
dollar  —  for  convenience 
in  exchange 


Double  eagle  ($20  gold  piece) 
Eagle  ($10  gold  piece) 
Half  eagle  ($5  gold  piece) 
Quarter  eagle  ($2.50  gold  piece) 


Paper  representatives  of  the 
basic  unit  or  multiples  of 
it  —  for  convenience  in 
exchange  (token  cur- 
rency) 


a.  Really,  warehouse  re- 
ceipts for  metal  de- 
posited in  United 
States  treasury 
(100%  reserve  held 
against  them) 


Metallic  tokens  or  represen- 
tatives (subsidiary  cur- 
rency) of  the  basic  unit  or 
parts  of  it  —  for  con- 
venience in  exchange 


b.  Secured  by  deposit  of 

partial    reserve    of 

gold    or    of    bonds 

or    of    commercial 

[  paper 

f  Silver  dollar 
I  Silver  half  dollar 
I  Silver  quarter  dollar 
I  Silver  dime 
Nickel  five-cent  piece 


Gold  certificates 
Silver  certificates 
Treasury     Notes 
(few) 


United  States  Notes 

(Greenbacks) 
♦Federal  Reserve 

Notes 
♦Federal  Reserve 

Bank  Notes 
♦National    Bank 

Notes 


L  Copper  (bronze)  one-cent  piece 


4.  Money     of  account     which  f  ^  i  j  j  n 

,       •     J  .    ^  •  J     Gold  dollar 

13  not  coined  but  is  used  \  a,,         ■,, 
...  Ihe  mul 

in  computations  [ 

Price  changes  have  many  causes.  —  If  we  become  accustomed 
to  thinking  of  the  dollar  as  just  a  lump  of  gold,  we  shall  more 
readily  understand  prices  and  changes  in  price.  When  we  say 
that  the  price  of  a  pair  of  gloves  is  one  dollar,  this  is  only  an- 
other way  of  saying  that  we  pay  one  of  these  lumps  of  gold 
(or  a  representative  of  this  lump)  for  the  gloves.  A  price  of 
two  dollars  means  two  lumps ;  three  dollars  means  three 
lumps ;  half-a-doUar  means  half  a  lump.  A  price,  then,  is 
the  amount  of  gold,  measured  in  lumps,  that  we  give  to  get 
an  article.  A  general  rise  of  prices  means  we  pay  more  lumps 
than  formerly  for  the  things  we  purchase ;  a  general  fall  of 
prices  means  we  pay  fewer  lumps. 

The  causes  lying  behind  general  changes  in  price  are  among  the 
most  complex  problems  in  economics  and  we  shall  not  try  to 


.'^46  OUR  ECONOMIC   ORGANIZATION 

study  them  in  detail.     It  will  l)c  sufficient  for  our  purposes  if 
we  see  that  such  general  changes  might  be  due  — 

1.  To  things  happening  to  gold  ; 

2.  To  things  happening  to  goods  for  which  money  is  ex- 
changed ; 

3.  To  things  happening  to  both  gold  and  the  goods. 
Let  us  take  these  three  possibilities  up  in  order. 

1.  Suppose,  by  a  miracle,  it  should  rain  many,  many  millions 
of  lumps  of  gold  to-night.  Clearly,  to-morrow  morning  a  lump 
of  gold  would  be  less  valuable  than  it  was  this  morning.  It 
would  take  more  of  them  to  buy  a  pair  of  gloves.  But  suppose 
that  instead  of  this  miracle,  vast  deposits  of  gold  which  could 
be  mined  very  cheaply  should  suddenly  be  discovered.  Clearly, 
in  time,  the  supply  of  gold  would  be  increased  from  this  cause 
and  prices  would  rise.  This  is  one  illustration  of  how  price 
changes  may  be  due  to  changes  on  the  gold  side  of  the 
exchange. 

2.  But  take  another  case.  Suppose,  with  no  change  in  the 
amount  of  gold,  a  miracle  should  bring  about  the  destruction 
to-night  of  half  of  each  article  for  which  money  is  ordinarily 
exchanged.  Clearly,  to-morrow  morning,  because  of  the  greater 
scarcity  of  these  goods  (as  compared  with  gold)  people  would 
pay  more  lumps  of  gold  for  each  of  them  than  they  did  this 
morning,  that  is,  prices  would  rise.  If,  now,  instead  of  this 
miracle,  the  supply  of  ordinary  goods  should  gradually  decline 
because  of  war-destruction  of  materials,  labor  unrest,  or  some 
other  cause,  their  prices  might  be  expected  to  rise.  This  is 
one  illustration  of  how  price  changes  may  be  due  to  changes 
on  the  goods  side  of  the  exchange. 

3.  The  third  case  needs  no  discussion.  It  would  be  illus- 
trated by  supposing  that  an  increased  supply  of  gold  occurred 
in  the  same  period  that  a  diminished  production  of  other  goods 
occurred. 

Prices  change  very  considerably.  —  The  possibility  of 
changes  in  general  prices  (in  the  "  price  level  ")  is  no  flight  of 
fancy.     It  is  a  very  common  occurrence.     If  we  take  the  last 


WORK   OF   MONEY   IN   ECONOMIC   ORGANIZATION     347 


few  generations  of  the  history  of  our  own  country  as  an  example, 
we  see  very  starthng  price  changes.  The  accompanying  chart 
shows  the  changes  which  have  occurred  since  1840  in  the  price 
level  of  a  wide  range  of  typical  commodities.  It  has  been 
reduced  to  a  percentage  basis  so  that  comparisons  may  readily 
be  made. 

Price  changes  are  serious  matters.  —  The  case  of  John 
Wilson  shows  how  disappointing  price  changes  may  be.  Mr. 
Wilson  had  a  family  of  four  and  wished  to  make  some  provision 


300 


200 


100 


■ 

V 

• 

■ 

V 

•'"""•n 

\. 

/ 

- 

- 

300 


200 


100 


From.  U.  G.  Moulton,  The  Financial  Organization  of  Society,  the  UniwrsUy  of  Chicago  Press. 
Level  of  Prices  from  1840  to  1920 

Heavy  black  line  shows  index  of  wholesale  prices-  Dotted  line  shows  gold 
prices  during  period  of  greenback  depreciation,  1862-1879.  In  what  periods 
were  there  marked  increases?  Marked  decreases?  Approximately  level 
prices  ? 

for  them  in  case  of  his  death.  He  thought  that  if  he  could 
arrange  for  them  to  have  an  income  of  $1500  a  year,  it  would 
suffice.  Accordingly  from  1895  to  1914  he  carried  life  insurance 
of  a  sort  that  would  pay  his  heirs  $1500  a  year  for  20  years 
after  his  death.  His  death  occurred  in  1914  and  his  family 
has  received  since  his  death  the  $1500  a  year.  But  since  1914 
prices  have  gone  up  about  100  per  cent  (to  1920),  so  that  the 
$1500  only  purchases  about  half  the  commodities  John  Wilson 
thought  his  family  ought  to  have. 

Another  case  is  that  of  Paul  E.  Kent,  who  teaches  in  one  of  our 


348  OUR   ECONOMIC   ORGANIZATION 

colleges.  From  1914  to  1920  prices  rose  100  per  cent,  but  the 
college  was  able  to  advance  Mr.  Kent's  salary  only  25  per  cent. 
This  is  rather  typical.  Wages  and  salaries  ordinarily  do  not 
rise  as  fast  as  other  prices.  This  means  difficulties  for  the 
wage  earners  and  salaried  men  thus  affected. 

Then,  too,  changing  prices  make  matters  more  uncertain 
for  business  men.  Their  risks  are  increased.  A  striking  case 
of  this  occurred  in  France  during  the  French  Revolution  when 
that  country  was  issuing  great  masses  of  paper  money  and 
prices  were  fluctuating  rapidly.  "  The  great  manufactories 
of  Normandy  were  closed ;  those  of  the  rest  of  the  kingdom 
speedily  followed,  and  vast  numbers  of  workmen  in  all  parts 
of  the  country  were  thrown  out  of  employment.  ...  In  the 
spring  of  1791  no  one  knew  whether  a  piece  of  paper  money, 
representing  100  francs  would,  a  month  later,  have  a  pur- 
chasing power  of  100  francs  or  90  francs,  or  80  or  60.  The 
result  was  that  capitalists  declined  to  embark  their  means  in 
business.  Enterprise  received  a  mortal  blow.  Demand  for 
labor  was  still  further  diminished.  The  business  of  France 
dwindled  into  a  mere  living  from  hand  to  mouth.  This  state 
of  things,  too,  while  it  bore  heavily  against  the  interests  of  the 
moneyed  classes,  was  still  more  ruinous  to  those  in  more  moder- 
ate, and  most  of  all,  to  those  in  straitened,  circumstances. 
With  the  masses  of  the  people  the  purchase  of  every  article 
of  supply  became  a  speculation  —  a  speculation  in  which  the 
professional  speculator  had  an  immense  advantage  over  the 
buyer.  Says  the  most  brilliant  apologist  for  French  Revolution- 
ary statesmanship,  '  Commerce  was  dead ;  betting  took  its 
place.' "  ' 

In  brief,  price  changes  (1)  mean  uncertainty  for  the  holders 
of  fixed  or  slowly  changing  incomes ;  (2)  uncertainty  for  those 
concerned  with  deferred  payments,  and  (3)  uncertainty  for  the 
risk-takers  in  business  enterprise. 

Good  money  has  certain  definite  characteristics.  —  Since 
money  plays  so  important  a  part  in  our  modern  life,  we  naturally 

'  Andrew  D.  White,  Paper  Money  Inflation  in  France. 


WORK   OF  MONEY   IN   ECONOMIC   ORGANIZATION     349 

wish  our  money  to  be  of  a  kind  which  will  do  its  work  well. 
This  is  a  very  large  and  a  very  complex  matter,  but  we  can  see 
something  of  what  is  involved  by  asking  ourselves  whether  gold 
is  a  good  basis  for  a  monetary  system. 

1.  The  basis  for  a  monetary  system  ought  to  be  generally 
acceptable,  and  this  means  in  practice  that  it  ought  to  be  valu- 
able in  itself.  Only  on  the  basis  of  its  being  generally  accept- 
able to  sellers  can  it  render  good  service  as  a  medium  of  ex- 
change. Of  course,  it  will  be  helpful,  in  a  regime  of  world 
commerce,  if  it  is  held  in  approximately  equal  esteem  by  all 
peoples.  Gold  measures  up  to  this  requirement  reasonably 
well. 

2.  It  ought  to  be  homogeneous,  readily  divisible,  and  capable 
of  being  readily  reunited.  Exchange  is  certain  to  require  its 
use  in  varying  quantities,  and  these  varying  quantities  ought  to 
be  obtainable  under  conditions  which  will  make  calculation 
easy.  Two  pounds  or  bushels  of  the  money  good  ought  to  be 
worth  just  twice  as  much  as  one.  This  can  only  happen  when 
quantities  can  be  broken  up  and  combined  without  loss  of  value. 
Diamonds  would  not  make  a  good  money  commodity  because 
a  large  diamond  is  much  more  valuable  than  the  two  small 
diamonds  which  could  be  made  from  it.  Gold,  on  the  other 
hand,  neither  gains  nor  loses  in  value  (in  proportion)  by  being 
divided  or  combined. 

3.  It  ought  to  be  portable  so  that  it  can  be  carried  from  one 
place  to  another  readily.  In  the  main,  this  means  that  it 
ought  to  have  considerable  value  in  proportion  to  its  bulk. 
Gold  meets  this  requirement. 

4.  It  ought  to  be  readily  recognized  and  distinguished  from 
other  substances  so  as  to  avoid  confusion  and  inconvenience. 
For  this,  gold  serves  as  well  as  would  most  other  commodities. 

5.  In  particular,  it  ought  to  have  stability  of  value  when  it 
comes  to  making  payments  over  long  periods  of  time.  If  the 
commodity  concerned  is  durable,  this  durability  assists  in  giving 
stability  of  value.  Upon  the  one  hand,  a  durable  commodity 
does  not  greatly  deteriorate  with  use  or  over  long  periods 


350  OUR  ECONOMIC   ORGANIZATION 

of  time ;  upon  the  other  hand,  its  durabiHty  finally  results  in  a 
very  large  fund  being  in  existence  so  that  the  relatively  small 
yearly  additions  of  supply  do  not  cause  great  changes  in  value. 
This  principle  is  a  simple  one.  A  bucket  full  of  water  poured 
into  a  lake  raises  the  level  of  the  lake  far  less  than  it  would  raise 
the  level  of  water  in  a  barrel.  It  would  be  ideal  if  we  could 
find  a  money  commodity  which  had  perfect  stability  of  value. 
We  have  never  found  it,  however.  Even  gold  has  been  quite 
unsatisfactory  from  this  point  of  view. 

Our  pecuniary  organization  is  very  useful  but  has  de- 
fects. —  We  ought  to  have,  now,  a  fairly  clear  idea  what 
money  is  and  how  it  is  used  in  the  organization  of  our  want- 
gratifying  machine.  It  is  a  tremendously  useful  device. 
Without  some  such  device,  it  is  hard  to  believe  that  we  could 
ever  have  developed  our  modern  world-wide  commercial 
organization  ;  our  modern  fruitful  specialization  ;  our  modern 
large-scale  production ;  our  modern  "  control  "  devices  in 
business  and  in  other  forms  of  management.  Money  is  a  good 
tool.  But  like  most  other  good  tools,  it  can  be  used  for  bad 
purposes.  From  time  to  time  in  our  study  we  shall  see  certain 
unfortunate  consequences  of  the  fact  that  much  of  our  modern 
life  is  worked  out  in  financial  terms.  In  this  present  chapter 
our  concern  has  been  simply  that  of  seeing  money  as  a  tool  to 
accomplish  desirable  ends. 

PROBLEMS 

1.  Give  some  examples  of  barter  in  modern  life.  What  difficulties 
of  a  system  of  barter  are  overcome  by  the  use  of  money  ? 

2.  Suppose  we  had  always  relied  on  barter,  —  had  never  had  any 
monetary  system.  Do  you  think  we  would  have  had  large-scale  pro- 
duction ?     Railroads  ?     SpeciaUzation  ?     Machine  industry  ? 

3.  A  buys  1000  bushels  of  wheat  from  B  at  SI  a  bushel.  B  ac- 
cepts in  payment  a  note  foi"  $1000  j^ayable  with  interest  two  years  from 
date.  Two  yejars  later  A  pays  B  the  $1000  with  interest  as  agreed. 
Which  of  the  money  functions  does  money  perform  in  the  course  of 
these  transactions? 


WORK   OF  MONEY   IN   ECONOMIC   ORGANIZATION     351 

4.  Explain  as  to  one  who  knows  nothing  about  it,  how  a  merchant 
uses  the  pecuniary  unit  in  determining  what  goods  to  put  on  his  shelves. 
Explain  how  a  manufacturer  determines  what  process  will  be  cheapest. 

5.  Producers  guide  their  output  by  the  demand  of  consumers  ex- 
pressed in  dollar  terms.  Explain.  What  methods  might  be  used  to 
guide  producers  if  we  had  no  monetary  unit  ? 

6.  Money  gives  its  possessor  power  to  command  productive  forces. 
Is  this  statement  true  of  the  manufacturer?  How  can  we  be  sure  the 
possessor  of  money  will  conmiand  productive  forces  in  a  way  that  will 
be  useful  to  society? 

7.  Would  the  merchant  not  be  as  well  off  if  there  were  no  money? 
Could  he  not  as  well  hire  clerks  and  pay  his  bills  in  merchandise  ? 

8.  What  is  a  budget?  Find  out  what  you  can  about  the  budget 
of  some  business  fii'm.  What  are  the  advantages  of  a  family 
budget  ? 

9.  Without  cost  accounting,  production  is  mostly  guesswork. 
What  does  this  statement  mean?  Is  there  any  truth  in  it?  Wliat 
difference  does  it  make  to  the  community  whether  a  manufacturer 
of  clothes  has  a  good  cost  system? 

10.  Without  a  unit  in  which  to  calculate,  our  expenditures  would 
be  planless  and  unreasonable.  Is  this  statement  true?  Explain  how 
the  pecuniary  imit  enables  us  to  organize  our  consumption. 

11.  What  is  the  dollar  ?  Would  it  have  been  possible  to  have  had  , a 
dollar  which  was  not  gold  ? 

12.  In  the  days  of  the  California  gold  discoveries  different  individuals 
and  firms  coined  their  own  gold  pieces.  Is  there  any  reason  for  pro- 
hibiting such  a  practice  and  reserving  the  right  of  coinage  to  the  govern- 
ment? 

13.  The  coinage  of  money  and  the  prevention  of  counterfeiting  are 
made  duties  of  the  national  government  by  an  explicit  provision  in 
the  Constitution.  Wliy  should  these  duties  be  laid  upon  the  national 
government  rather  than  upon  the  state  governments  or  local  com- 
munities ? 

14.  In  the  middle  ages  there  were  places  where  one  could  not 
journey  so  much  as  25  miles  without  having  to  have  his  money 
changed.  Why  are  money  changers  not  necessary  when  one  crosses 
from  one  of  our  states  into  another? 


352  OUR   ECONOMIC   ORGANIZATION 

15.  Can  you  see  any  reasons  why  the  government  should  make 
such  exact  requirements  of  the  composition  of  the  alloy  of  our  coins 
and  the  weight  of  our  coins  ? 

16.  What  does  the  word  "token"  mean?  Why  is  our  small  change 
not  made  of  gold  ?  What  reasons  can  you  assign  for  having  subsidiary 
coins  ?    For  having  paper  money  ? 

17.  What  would  be  the  advantage  of  a  2|-cent  piece?  Of  what 
metal  would  it  probably  be  made  ? 

18.  Many  of  the  designs  on  paper  money  are  intended  to  represent 
some  fact  of  history.  Examine  several  different  denominations  of 
bills  and  describe  the  pictures  and  show  what  they  mean. 

19.  How  many  different  khids  of  materials  are  used  for  money  in 
the  modem  monetary  system  ? 

20.  In  1916  the  United  States  mint  at  Philadelphia  made  coins  for 
Cuba,  Colombia,  Ecuador,  Salvador,  Venezuela,  and  Peru.  The  San 
Francisco  mint  made  coins  for  the  Philippines.  Why  did  these  coun- 
tries not  make  their  coins  at  home  ? 

21.  A  Canadian  dime  passes  at  par  in  Minneapolis,  but  is  worth 
only  8  cents  in  St.  Louis.  Can  you  see  any  reasons  for  this?  Would 
the  situation  be  the  same  with  gold  money? 

22.  Gold  money  is  standard  money.  How  are  other  forms  of  money 
kept  equal  in  value  to  gold  money?  Is  it  important  that  they  should 
be  kept  equal  in  value  ? 

23.  Some  money  is  called  bank  notes.  Why  ?  Some  bills  are  called 
silver  certificates,  others  gold  certificates.     Why? 

24.  Explam  how  a  general  rise  of  prices  is  another  way  of  saying 
that  gold  has  less  purchasing  power.  Is  a  general  rise  of  prices  a 
good  thing?     If  so,  for  whom ? 

25.  Sometimes  we  say  that  a  rise  of  prices  draws  social  resources 
into  production  in  a  certain  field.  Do  we  have  in  mind  a  general  rise  of 
prices  when  we  say  this  ? 

26.  Was  the  possessor  of  a  fLxed  income  in  an  advantageous  or  in  a 
disadvantageous  position  during  the  decade  from  1870-1880?  From 
1910-1920? 

27.  During  the  Revolutionary  War  colonial  paper  money  was  much 
reduced  in  purchasing  power.    What  does  this  mean?    Why  did  it 


WORK   OF  MONEY   IN   ECONOMIC    ORGANIZATION     353 

happen  ?    At  the  end  of  the  Civil  War  Confederate  paper  money  had 
no  value.     Why  was  this  ? 

28.  Make  a  Ust  of  the  quahties  desirable  in  the  standard  money  of 
a  country.  Skins,  cattle,  tobacco,  sea  shells,  slaves,  wampum,  olive 
oil,  stones,  and  dried  fish  have  all  been  used  as  money.  Point  out 
disadvantages  in  each  of  these  as  money. 

29.  Much  is  said  of  the  desirabiUty  of  a  stable  money.  What  does 
this  mean  ?     Wliy  is  it  desirable  ? 

30.  Does  the  value  of  a  coin  change  from  time  to  time  ?  Explain 
your  answer. 

31.  When  one  has  things  charged  at  a  store,  one  is  depending  on 
credit  rather  than  coin.     What  is  credit,  and  how  is  it  related  to  coin? 

32.  Can  we  compare  the  value  of  our  imit  with  those  of  foreign 
countries?     How  many  dollars  in  an  English  "pound"? 

33.  Does  foreign  paper  money  pass  as  readily  in  this  country  as 
foreign  coins  ?    Why  ? 

34.  Draw  up  an  outUne  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:   pp.  304-310,  Selections 
113-119. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life: 

Series  C,  Lesson  C-21,  McLaughlin,  "  Before  Coins  Were  Made." 
Lesson  C-22,  Reticker,  "  The  Minting  of  Coins." 
Lesson  C-23,  Reticker,  "Paper  Money." 
Lesson  C-24,  Kirkpatrick,  "  Money  in  the  Community 
and  the  Home." 


STUDY   XX 

FINANCIAL  INSTITUTIONS  AND  FINANCIAL 
ORGANIZATION 

PURPOSES  OF  THIS  STUDY: 

1.  To  study  the  financial  institutions  that  aid  the  business  organizer  in 

securing  funds. 

2.  To  see  these  institutions  as  an  organized  system  aiding  in  the  pro- 

duction of  goods. 

The  story  of  the  work  of  the  pecuniary  unit  in  our  modern 
industrial  society  would  be  quite  incomplete  without  some 
account  of  the  devices  and  institutions  which  have  come  into 
being  in  connection  with  the  work  of  that  unit.  In  this  chapter 
we  shall  make  a  survey  of  these  devices  and  institutions  from 
the  point  of  view  of  the  business  manager,  who,  having  decided 
to  direct  social  resources  to  the  production  of  some  good,  makes 
use  of  them  in  getting  command  of  productive  energy.  Of 
course,  the  business  manager  is  not  the  only  person  who  uses 
them.     His  use  will,  however,  serve  as  a  good  sample. 

We  have  already  seen  (see  p.  325)  that  one  who  commands 
money  or  its  equivalent  is  in  a  position  to  command  productive 
energy.  He  uses  funds  to  get  land,  labor,  and  capital,  to  do  his 
bidding.  The  problem  before  us  now  is,  how  does  he  get 
command  of  funds?  What  devices  and  institutions  are  used  in 
the  process? 

The  simplest  way  in  which  the  organizer  may  obtain  funds 
with  which  to  pull  productive  force  into  his  l)usiness  is  to  draw 
upon  his  own  resources.  But  not  every  business  organizer  has 
sufficient  resources  to  conduct  his  business  on  as  large  a  scale 
as  he  desires.  It  is  necessary,  therefore,  that  he  obtain  funds 
elsewhere.     One  way  of  doing  this,  in  a  successful  business, 

354 


FINANCIAL   ORGANIZATION  355 

is  that  of  turning  the  profits  back  into  the  business.  Such 
profits  could  be  used  for  various  purposes;  for  example,  for 
purchasing  more  machinery  or  for  enlarging  the  factory  (these 
would  be  illustrations  of  increasing  what  we  call  "fixed" 
capital)  or  for  purchasing  more  raw  materials  (which  are  one 
form  of  "working"  capital).  This,  however,  is  a  slow  way 
unless  profits  are  unusually  large.  It  probably  would  not 
enable  the  manager  to  take  quick  advantage  of  some  new 
development  in  markets  or  in  technology.  There  are,  for- 
tunately, ways  in  which  he  may  suddenly  expand  his  funds. 
He  may  do  so  by  borrowing  from  a  friend  or  by  borrowing 
through  a  loan  agent  who  makes  it  his  business  to  find  out  who 
will  lend  money  and  to  bring  borrowers  and  lenders  together. 
He  may  obtain  additional  funds  by  taking  a  partner  into  his 
business.  This  method,  as  we  saw  in  an  earlier  lesson  (see 
p.  276)  gives  only  a  limited  amount  of  money.  A  corporation 
may  be  formed  and  enough  shares  of  stock  sold  to  provide  the 
needed  resources.  All  of  these  methods  we  have  studied  briefly 
earher.     (See  Study  XVI.) 

In  our  further  study  of  the  ways  in  which  managers  get  com- 
mand of  funds  let  us  distinguish  between  two  types  of  cases : 
(a)  sometimes  the  manager  wishes  to  command  additional 
funds  for  a  short  time  only,  —  he  wishes  to  add  to  his  working 
capital,  (6)  sometimes  he  wishes  to  command  additional  funds 
for  a  long  time,  in  which  case  he  wishes  to  add  either  to  his 
fixed  capital,  or  to  his  working  capital,  or  to  both. 

Working  capital  secured  from  trade  credit  and  from  banks.  — 
There  is  hardly  a  business  organization  which  does  not  have 
need  of  funds  for  short  periods  of  time.  A  farmer,  for  example, 
being  less  busy  in  the  cold  months  than  in  the  summer,  often 
decides  that  he  will  buy  a  carload  of  cattle  and  fatten  them  dur- 
ing the  winter.  He  buys  the  stock,  perhaps,  in  October. 
By  May  they  are  ready  for  the  mai'ket.  Unless  he  has  surplus 
funds  of  his  own  it  is  necessary  for  him  to  make  a  loan  for  six 
or  seven  months.  He  plans  to  repay  the  loan  with  its  interest 
when  the  cattle  are  sold. 


356  OUR  ECONOMIC   ORGANIZATION 

Or  suppose  that  a  dry  goods  merchant  gets  in  his  stock  of 
spring  styles  in  February.  This  makes  a  demand  on  him  for  a 
large  payment.  By  May  or  June,  he  expects  to  have  this  stock 
entirely  sold.  He,  therefore,  needs  this  money  only  for  a 
period  of  three  or  four  months.     Or,  again,  a  manufacturer 


^600. 00  Due . 

JVo.  ^^6  Chicago,  Illinois,  Tn^^^h  /£,  /(//(/. 
$!i/?ctif  cli^ifii'  -  -  -  after  date  for  value  received  the  under- 
signed promise  to  pay  to  the  order  of 

^\)t  il^ational  Cit^  BanH  of  Cljicago 

at  its  Banking  House  in  Chicago,  Illinois,  with  interest 
After  Maturity  at  the  rate  of  seven  per  cent  per  annum 
until  paid  and  with  costs  of  collection  and>  a  reasonable 
attorney  fee  if  not  paid  at  maturity.  Presentment  and 
deinand  for  payment,  notice  of  non-payment,  protest 
and  notice  of  protest  are  each  and'  all  hereby  waived  by 
the  makers,  endorsers  and  guarantors  jointly  and  sever- 
ally. Any  indebtedness  owing  froin  said  bank  or  legal 
holder  hereof  to  the  undersigned,  or  guarantor  may  be 
appropriated  and  applied  by  said  bank  or  legal  holder 
on  this  note  at  any  time  either  before  or  after  maturity 
of  this  note  and  without  demand  upon  or  notice  to 
any  one. 

Business  address :  fo/m  ^o& 

^6  jCd'^aA^eXte  CLv-& Ri/i'ka.icL  Roe 


An  Unindoksed  Promissory  Note 

may  wish  to  purchase  a  supply  of  steel.  In  three  months'  time 
he  expects  to  have  this  steel  made  into  hardware  and  sold. 
He,  like  the  other  organizers,  needs  a  short  time  loan.  Some- 
times the  organizer  gets  this  loan  by  (in  effect)  borrowing  from 
the  person  from  whom  he  buys  the  goods.  He  buys  "  on 
trade  credit  "  which  means  that  he  obtains  a  deferment  of 
payment  until  he  has  had  a  chance  to  sell  the  goods.     A  great 


FINANCIAL    ORGANIZATION  357 


Mo.  '37  Due  /rixif  18,  /q/6  ^600.00 

Chicago,  Illinois,       I'l^ve^k  18,  /(jf/6. 

Sixty  days  after  date  pay  to  the  order  of 
^wiO'&tv-e^. S^vu&  /I'u.nclve'cC  cCattoA^ 

The  OhUgation  of  the  acceptor  hereof, (cfnvttA) 

arises  out  of  the  purchase  of  goods  from,  the  drawer 

{^.bo&) jyvaturity  being  in  confonnity  with  original 

terms  of  purchase.  The  drawee [ifwltA) may  ac- 
cept this  hill  payable  at  any  bank,  trust  company,  or 
banker's  office  in  tJve  United  States  which  he  may 
designate. 

To fo-k^^  ^yyvWl (Drawee)  fohTt  ^0& 

/ 67 -folk   ^tv&et  (Signature  of  Drawer) 

cA&%\}-   IjAvk^  ^-it^ 


Sample  of  a  Trade  Acceptance 

Note  :  If  Smith  writes  across  the  face  something  like  this 

?na.v^k  20,  /(ff6. 

S'a,ya,6-t&  at  ^ucivamt&&  <S)yuat  ^a.  a^  cA&ta/-  VxnA 

1^5  fSvoa<iw<i-if,  cA&w-  lAavk, 

fa^vn  ^yyuiZk 

Doe  can  then  "discount"  it  at  once  at  liis  bank,  say  the  National 
City  Bank  of  Chicago,  and  the  bank  later  collects  from  Smith. 

deal  of  working  capital  is  obtained  in  this  way.  The  seller 
"  carries  "  the  buyer  for  a  time.  True,  the  seller  is  likely  to 
take  the  evidences  of  the  transaction  to  a  commercial  paper 
house  or  to  a  commercial  bank  and  sell  them  to  this  institution, 
which  then  really  does  the  "  carrying,"  but  that  we  shall  dis- 
cuss separately. 

The  financial  institution,  or  middleman,  that  is  most  useful 
in  supplying  business  men  with  money  for  short  periods  is  the 
commercial  bank,  which  is  the  type  of  bank  found  in  every 
town  and  familiar  to  all  of  us.     The  bank  may  make  such  a 


358  OUR  ECONOMIC   ORGANIZATION 

loan  on  the  basis  of  the  "  promissory  note  "  of  the  borrower 
(often  asking  that  others  "  indorse  "  the  note  or  stand  ready 
to  repay  if  the  borrower  proves  unable  to  do  so).  Or  the  bank 
may  "  buy "  a  "  commercial  bill  of  exchange "  which  the 
borrower  holds  against  some  one,  —  generally  some  one  to  whom 
he  has  sold  goods  "  on  time."  In  this  latter  case  the  bank 
advances  the  money  at  once  (at  a  discount)  and  collects  later 
from  the  buyer  of  the  goods.  There  are  other  ways  of  making 
a  bank  loan,  but  these  are  the  main  ways  and  they  serve  as  good 
samples  of  all. 

The  commercial  bank  lends  funds  of  its  shareholders  and 
depositors.  —  But  where  and  how  does  the  bank  get  the  funds 
it  lends?  From  two  sources.  When  the  bank  was  started 
the  owners  turned  in  money  which  can  be  so  used.  Also, 
from  time  to  time  people  "  deposit  "  money  in  the  bank  with 
the  understanding  that  they  are  free  to  draw  it  out  at  any  time 
they  please. 

When  one  of-  us  makes  a  deposit  in  a  bank  for  the  first  time 
(let  us  assume  for  our  present  discussion  it  is  in  cash,  though 
this  is  not  usually  the  case)  the  bank  enters  our  name  in  a  book 
which  is  called  its  ledger  and  "  posts  "  or  writes  under  it  the 
amount  of  money  which  we  have  deposited.  It  keeps  such  an 
account  for  every  one  of  its  depositors.  Suppose  that  you  have 
deposited  $500  in  cash  with  your  bank.  Your  account  now 
shows  that  $500  is  credited  to  you.  The  next  day  you  buy 
a  horse  for  $200  from  a  friend  named  Brown.  You  give  him 
an  order,  or  check,  ordering  the  bank  to  pay  him  $200  of 
your  money.  You  take  the  horse  and  he  takes  the  check. 
Brown  goes  to  the  bank.  The  check  gives  him  authority  to 
demand  $200  of  your  money  in  currency,  but,  instead  of  order- 
ing the  bank  to  pay  him  $200,  he  orders  them  to  keep  the 
$200  for  him.  The  bank  accomphshes  this  without  handling 
any  money.  It  merely  subtracts  $200  from  your  account 
and  places  $200  to  Brown's  credit.  During  the  next  week. 
Brown  writes  two  checks  "  on  the  bank  "  ordering  them  in  one 
case  to  pay  $50  to  the  butcher,  and  in  another  $50  to  the  grocer. 


FINANCIAL    ORGANIZATION  359 


Denver,  Colo.,      ^tjo.t.  /U,  f^/S  Mo.     ^2 

i?tr0t  jl^ational  llBanfe  of  Denter 

Tay  to  the  order  of 

fakn,  fSuyw-yv f  200.00 

3w-a   k'wytcLi&cL  a^yicL, ^       Dollars 

fi-e.nXA*   ofyrLttk 


A  Common  Form  of  Check 

The  butcher  and  grocer  take  these  checks  to  the  bank  and 
follow  the  same  practice  which  we  have  already  noticed. 
They  merely  deposit  these  checks.  The  bank  subtracts  the 
$100  from  Brown's  account  and  credits  $50  respectively  to  the 
accounts  of  the  butcher  and  the  grocer.  Thus  at  the  end  of 
the  week,  the  bank's  ledger  stands  as  follows : 

To  your  credit $300.00 

To  Brown's  credit 100.00 

To  the  butcher's  credit 50.00 

To  the  grocer's  credit 50.00 

The  bank  itself  still  has  the  $500  in  cash  which  you 
deposited.  Although  it  has  satisfied  everybody,  it  has  not 
had  to  pay  out  any  money.  It  is  an  extreme  illustration  to 
assume  that  no  money  was  paid  out,  but  usually  onl}^  a  small 
proportion  is  drawn  out.  Bankers,  therefore,  have  seen  that 
they  can  make  loans  from  the  cash  which  is  deposited  with  them. 
They  have  learned  that  when  money  is  placed  in  their  hands, 
in  at  least  three  cases  out  of  four,  and  frequently  in  nine  cases 
out  of  ten,  the  orders  or  checks  which  are  drawn  against  these 
deposits  are  not  cashed,  —  that  is,  taken  in  currency,  —  but 
are  merely  redeposited. 

But  how  much  may  a  bank  loan  and  still  be  ready  to  meet 
all  demands  for  cash  that  come  to  it?     The  experience  of  a 


360  OUR   ECONOMIC   ORGANIZATION 

Chicago  bank  answers  this  question.  This  bank  loaned 
to  a  retail  hardware  merchant.  The  merchant  said,  "  I  do 
not  want  the  actual  money,  I  might  be  robbed.  I  will  leave  it 
here  to  'my  credit'  and  give  checks  against  it."  This  man, 
the  next  week,  gave  a  check  to  a  wholesale  hardware  dealer 
for  $400,  and  a  check  to  a  tire  company  for  $100.  Soon  after- 
wards he  paid  two  salesmen  each  $50  with  checks  and  gave  a 
check  for  a  $200  order  of  cement. 

Each  of  the  persons  who  had  received  these  checks  took  them 
to  the  bank.  The  wholesaler  deposited  the  entire  amount 
and  drew  no  cash.  The  cement  dealer  deposited  $100  and 
asked  for  $100  in  currency.  One  salesman  cashed  his 
check,  while  the  second  placed  his  on  deposit.  The  tire  com- 
pany took  $50  cash  and  deposited  the  balance.  Thus  the 
bank  in  making  a  loan  of  $800  found  that  it  was  asked  to 
pay  out  only  $200  or  25  per  cent  of  the  loan.  Long  study 
in  making  loans  has  taught  bankers  that  this  case  illustrates  a 
general  condition.  Bankers  have  found  that,  if  a  reserve  in 
cash  from,  say,  10  per  cent  to  25  per  cent  as  large  as  the  amount 
of  loans  is  kept  on  hand,  they  can  meet  all  demands.  A  bank 
which  has  $100,000  in  cash  can,  therefore,  loan  $400,000  at  least 
and  often  as  much  as  $1,000,000,  and  be  safe.  The  bank  makes 
its  profits,  of  course,  from  the  interest  it  receives. 

The  bank  needs  to  be  as  certain  as  possible  that  any  loan  it 
makes  will  be  paid  back  at  the  proper  time.  Bankers  are, 
therefore,  usually  very  careful  in  making  loans.  Below  is  a 
list  of  matters  which  banks  commonly  investigate  before  grant- 
ing loans  to  a  business  man.^ 

Pertaining   to    Character   of  Bor-      Pertaining    to    Character    of    the 

rower  Business 

(a)  Record  for  honest  dealing.  (a)  Ratio  of  quick  assets  to  cur- 

rent liabilities. 
(6)  Personal  habits.  (h)  Amount   of   capital   invested 

1.    Church  affiliations.  and  proportion  owned. 

'  H.  G.  Moultou,   The  Financial  Orijanizalion  of  Society. 


FINANCIAL   ORGANIZATION  361 


Character  of  stock  of  goods. 
Rate  of  turnover  of  stock. 
Location    of    business,    and 

character  of  competition. 
Insiirance  carried. 


ic) 


2. 

Gambling    and     drinking 

(c) 

tendencies. 

id) 

3. 

Political  ambitions. 

ie) 

4. 

Style     of     Uving;     wife's 

social  ambitions. 

if) 

Reputation  for  ability. 

L 

Common-sense  and 
shrewdness.' 

2, 

Age  and  general  experience. 

3. 

Success  in  this  line  of  busi- 
ness. 

4. 

Success  in  other  lines  of 
business. 

A  financial  structure  serves  the  need  for  working  capital.  — 

The  right-hand  sides  of  the  diagrams  on  page  362  and  page  363 
illustrate  how  an  individual  firm,  a  partnership,  or  a  corporation 
may  resort  to  financial  institutions  to  get  working  capital  and 
how  finally  the  dependence  is  upon  the  funds  of  shareholders 
and  depositors.  The  introduction  into  the  diagrams  of  the 
commercial  paper  houses  and  the  commercial  credit  or  dis- 
count companies  need  not  be  confusing.  Commercial  paper 
houses,  for  the  most  part,  operate  as  "  brokers  "  who  "  bring 
together "  the  bank  and  the  business  man.  Commercial 
credit  or  discount  companies,  aside  from  the  fact  that  they  do 
not  have  "  depositors,"  operate  in  furnishing  working  capital 
much  as  do  commercial  banks.  Very  frequently  they  borrow 
from  the  commercial  banks  as  a  means  of  getting  part  of  the 
funds  they  use. 

Fixed  capital  (and  some  working  capital)  secured  through 
investment  institutions.  —  If  a  manager  has  not  sufficient  funds 
of  his  own  and  does  not  wish  to  wait  for  the  slow  accumulation 
of  earnings  in  order  to  expand  his  business,  he  may  resort  to 
financial  institutions  to  get  funds  for  his  fixed  capital  also. 
In  this  work  also,  certain  paper  devices,  stocks,  bonds  (see  p. 
281),  short  time  notes,  and  mortgages,  are  evidences  of  the 
transactions.     The  left-hand  sides  of  the  diagrams  on  page  362 


362 


OUR  ECONOMIC  ORGANIZATION 


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FINANCIAL  ORGANIZATION 


363 


364  OUR   ECONOMIC   ORGANIZATION 

and  page  363  show  through  what  institutions  these  paper 
devices  pass  and  the  persons  upon  whom  rests  the  final  depend- 
ence for  the  funds.  It  will  be  sufficient  for  our  purposes  if 
we  trace  some  of  the  more  significant , features  of  the  process 
in  the  case  of  the  corporation. 

Let  us  suppose  that  a  corporation  which  has  been  operating 
successfully  for  some  years  wants  half  a  million  dollars  to  build 
an  addition  to  its  factory.  One  way  in  which  this  may  be 
secured  is  by  the  issue  and  sale  of  additional  stock  or  bonds 
(see  pp.  281-285).  To  advertise  these  securities  the  company 
may  publish  a  booklet  —  usually  called  a  prospectus.  In  this 
prospectus  the  past  success  of  the  company  s  stated,  the 
prospects  for  the  future  are  set  forth,  and  the  place,  and  price 
at  which  the  new  securities  may  be  obtained  are  indicated.  The 
prospectus  is  mailed  to  a  large  number  of  persons  who  possibly 
have  money  for  investment.  Usually,  however,  a  corporation 
does  not  attempt  to  sell  its  new  issues  itself.  The  officers  of 
the  company  go  to  a  broker,  —  that  is,  a  man  who  specializes 
in  selling  securities  and  who  has  on  hand  lists  of  persons  who 
are  likely  to  make  investments  of  this  sort  —  and  ask  him  to 
sell  the  stock.  The  broker  usually  mails  out  a  prospectus  such 
as  has  been  described  above  and  frequently  sends  out  salesmen 
who  attempt  to  sell  the  new  issues  to  investors.  Magazines 
and  newspapers,  especially  those  which  are  read  by  the  more 
wealthy  classes  of  people,  are  often  used  to  advertise  the  new 
issues. 

Sometimes  the  corporation  takes  its  new  issues  of  securities 
to  banking  companies  (investment  banks)  which  make  a 
specialty  of  this  kind  of  business.  These  investment  institu- 
tions may  buy  the  securities  outright  and  then  sell  them  to 
others,  or  they  may  take  them  for  later  sale,  guaranteeing  the 
corporation  a  certain  price,  or  they  may  handle  the  matter  upon 
some  other  basis.  In  any  case,  they  are  middlemen  in  just 
the  same  sense  as  is  the  wholesale  hardware  dealer  who  sells 
his  wares  to  retailers.  They  have  lists  of  customers  who  have 
money  to  invest  in  securities  just  as  a  grocery  store  has  a  list 


FINANCIAL   ORGANIZATION  365 

of  customers  who  buy  its  goods.  Among  these  customers  are 
private  individuals,  business  organizations  such  as  partner- 
ships and  corporations,  insurance  companies,  trust  companies, 
and  savings  banks. 

One  might  wonder  how  the  savings  bank  secures  money  to 
invest  in  corporation  bonds.  The  savings  bank  invests  in  part 
its  own  money  and  in  part  the  money  of  its  depositors.  Many 
persons  who  never  think  of  buying  bonds  deposit  money  in 
savings  banks  for  three  or  four  per  cent  interest.  The  savings 
bank  takes  these  deposits  and  purchases  bonds  on  which  they 
receive  five  or  six  per  cent.  The  difference  in  these  rates  of 
interest  is  a  source  of  profit  for  the  savings  bank.  One  reason 
why  many  people  put  their  money  in  savings  banks  at  three 
per  cent  interest  instead  of  buying  bonds  is  that  they  do  not 
trust  their  own  judgment  in  selecting  investments.  They 
know  that  the  savings  bank  is  usually  safe.  The  savings  bank 
thus  acts  as  an  agency  for  many  people  in  directing  their  savings 
to  safe  channels  and  gives  them  a  service  which  they  could  not 
render  themselves. 

Insurance  companies,  as  we  have  learned  in  an  earlier  lesson, 
collect  premiums  from  a  great  number  of  people  and  from  the 
total  of  these  pay  certain  financial  losses  which  some  individuals 
incur.  With  these  premiums,  the  insurance  companies  make 
large  purchases  of  securities,  —  generally  bonds.  This  is 
only  another  way  of  saying  that  business  corporations  secure 
funds  from  insurance  companies.  It  is  not  difficult  to  see  that 
in  this  way  the  insurance  companies  earn  an  interest  with 
the  money  which  is  put  in  their  hands.  It  is  also  easy  to 
see  that  the  insurance  company  and  bond  houses  act  as 
financial  middlemen,  bringing  the  borrowing  corporation  into 
touch  with  the  funds  of  the  individuals  who  pay  insurance 
premiums. 

Trust  companies  perform  many  tasks  in  our  society.  Among 
other  tasks,  they  administer  funds  placed  in  their  care  "  in  trust " 
for  others.  They  of  course  wish  to  invest  these  funds  and  one 
way  of  doing  so  is  to  purchase  corporate  securities,  thus  serving 


366  OUR  ECONOMIC   ORGANIZATION 

as  a  means  by  which  corporations  can  tap  the  financial  resources 
of  those  with  whom  the  trust  companies  have  deahngs  — 
shareholders,  trust  funds,  estates,  etc. 

The  placing  of  the  stock  exchange  on  the  diagram  does  not 
mean  that  corporations  can  sell  securities,  "  to  "  the  stock 
exchange.  Stock  exchanges,  which  exist  in  most  of  our  im- 
portant industrial  and  commercial  centers,  are  simply  market 
places  where  buyers  and  sellers  of  securities  meet.  They  are 
not  fundamentally  different,  either  in  organization,  or  purpose, 
or  results,  from  the  grain  and  produce  exchanges  with  which 
we  are  already  familiar. 

These  exchanges  formulate  their  own  rules  concerning  the 
securities  which  may  be  bought  and  sold  on  the  exchange. 
Corporations  must  go  through  certain  formalities  and  estab- 
lish certain  facts  concerning  their  business  before  their  securities 
may  be  traded  in  on  the  exchange.  When  they  are  admitted, 
it  is  said  that  they  are  "  listed."  The  securities  of  our 
best  known  and  larger  companies  are  generally  listed  in  these 
organized  markets,  although  some  important  companies  have 
not  thought  such  listing  worth  while.  In  New  York  there  is 
a  market  formerly  held  out  in  the  open  street  (hence  called  the 
curb  market),  which  deals  with  some  of  these  unlisted  securities. 
The  term  "curb  market"  has  been  extended  to  include  tele- 
phonic and  other  transactions  by  agents  and  brokers  in  these 
unlisted  securities. 

These  organized  exchanges  are,  in  the  main,  very  useful, 
productive  institutions.  They  make  investment  and  with- 
drawal from  investment  easy,  since  here  is  a  place  where  every 
one  may,  through  the  agents  or  brokers,  buy  and  sell ;  they  bring 
to  a  focus  all  available  information  concerning  their  corporate 
securities,  just  as  the  produce  exchanges  do  for  produce,  and 
thus  enable  everyone  to  have  access  to  expert  judgment  on  the 
value  of  securities ;  they  thus  serve  as  a  sort  of  measuring 
agency  by  which  society  can  tell  what  businesses  and  what 
lines  of  business  are  in  demand,  and  to  which  accordingly,  social 
resources  may  profitably  be  directed. 


FINANCIAL   ORGANIZATION  367 

Financial  organization  very  useful  in  production.  —  The 
foregoing  pages  and  especially  the  diagrams  on  pp.  362,  363 
give  us  a  picture  of  some  of  the  financial  devices  and  financial 
institutions  used  in  our  society.  The  picture  is  incomplete; 
it  is  designed  to  show  only  certain  aspects  of  our  financial 
structure ;  it  is  a  fragmentary  sketch.  No  mention  was  made 
of  the  mint,  the  government  treasury,  farmers'  loan  banks, 
cooperative  financial  institutions,  pawn  brokers'  establish- 
ments, and  others.  Incomplete  as  it  is,  however,  the  picture 
enables  us  to  see  something  of  what  is  called  the  financial 
organization  of  society. 

Our  discussion  of  the  subject  has  probably  convinced  us  that 
this  financial  organization  is  very  useful  to  the  modern  business 
manager.  But  is  this  banking  and  credit  system  ("  credit 
involves  getting  something  now  and  paying  for  it  later  ")  ^ 
worth  while  from  the  broad  social  point  of  view?  Does  its 
presence  enable  us  to  gratify  our  wants  more  easily  and  more 
fully  ?  Is  it  a  vital  part  of  modern  industrial  society,  —  a  part 
which  performs  useful  functions?  The  answer  is  distinctly 
in  the  affirmative,  but  there  are  so  many  persons  who  think 
of  our  financial  organization  as  a  nest  of  toll-takers  from  in- 
dustry (not  to  say  pirates  preying  upon  industry),  that  it  is 
worth  while  to  state  the  reasons  for  the  affirmative  answer. 

We  have  seen  (see  Studies  IX-XII)  the  gains  we  derive 
from  our  society  being  made  up  of  specialists.  We  have  seen 
that  it  is  essential  that  these  specialists  be  knitted  together 
into  a  producing  mechanism  in  which  productive  resources 
are  apportioned  to  the  desires  of  society.  The  bankers  and  the 
other  persons  connected  with  our  financial  organization  are 
"functional  middlemen"  (see  p.  144)  who  aid  in  this  process. 

To  begin  with,  they  facilitate  exchange.  There  is  a  long  and 
interesting  history  back  of  our  modern  facile  exchange.  First 
there  was  the  crude  form  of  exchange  we  call  barter.  Then 
came  "  mediated  "  exchange  where  the  medium,  or  go-between, 
money  was  used  (see  p.  199).     Next,  through  long  generations 

>  H.  G.  Moulton,  The  Financial  Organization  of  Society. 


368  OUR  ECONOMIC   ORGANIZATION 

we  slowly  learned  our  lessons  concerning  the  importance  of 
a  "  good  "  system  of  money.  While  learning  these  lessons  we 
came  to  realize  that  even  money  exchange  is  sometimes  slow 
and  clumsy  and  there  gradually  came  into  use  "  orders  for 
money  "  (for  example,  the  check),  and  institutions  (banks)  which 
served  as  clearing  houses  for  these  orders.  Our  account  of  the 
work  of  the  commercial  bank  (see  p.  358)  showed  this  system 
in  operation.  The  system  facilitates  exchange,  makes  the 
marketing  processes  more  effective,  and  therefore  facilitates 
the  cooperation  of  modern  specialists. 

The  benefits  are  not  confined  to  a  more  ready  exchange  of  the 
ordinary  goods  which  we  consume,  important  as  that  is.  There 
is,  in  addition,  a  better  organization  of  what  we  ordinarily 
call  production.  Very  frequently  there  are  people  with  surplus 
funds  (and  we  know  that  funds  command  productive  resources) 
who  do  not  wish  to  engage  in  production  themselves,  either 
because  of  preference  or  because  of  lack  of  training.  These 
surplus  funds,  whether  large  or  small,  are  gathered  up  by  our 
financial  organization  and  are  made  available  for  our  enter- 
prisers who  see  opportunities  for  engaging  in  profitable  pro- 
duction (see  p.  327).  This  is  a  valuable  service  even  in 
the  case  of  small  businesses  and  it  is  even  more  valuable  in 
large  ones.  It  is  doubtful,  indeed,  whether  we  could  have 
large-scale  production  with  all  its  advantages  if  it  were  not  for 
our  mechanism  for  transferring  funds  to  those  who  require 
them.  Certainly,  this  mechanism  facilitates  large-scale  pro- 
duction in  the  cases  where  that  has  been  established  to  be  an 
effective  form  of  production. 

Since  the  extent  to  which  specialization  may  wisely  be  carried 
depends  in  large  part  (see  p.  198)  upon  the  effectiveness  of 
our  coordinating  devices,  it  follows  that  our  financial  organi- 
zation, by  facilitating  exchange  and  by  assisting  production, 
"  makes  possible  the  extreme  specialization  which  is  the  chief 
source  of  the  material  wealth  of  modern  societies.  It  is  there- 
fore fundamental  to  modern  industry,  in  the  same  way  and  to 
the  same  degree  as  are  the  means  of  transport ;  it  developed  as 


FINANCIAL   ORGANIZATION  369 

they  developed,  and,  though  its  working  is  not  so  obvious  as 
are  bridges,  embankments,  and  docks,  it  is  as  important."  ^ 

It  is  not  difficult  to  see  that  these  financial  devices  and  in- 
stitutions greatly  facilitate  the  apportionment  of  our  pro- 
ductive resources  to  the  wants  of  society.  They  enable  an 
assembling  of  funds  and  then  a  ready  flow  (and  these  funds 
command  productive  energy)  to  the  enterprisers  who  seem 
likely  to  supply  society's  wants  successfully.  The  managers 
of  these  financial  institutions  are,  of  course,  in  a  strategic 
position  but  they  cannot  wisely  be  arbitrary  in  the  matter. 
They  make  their  gains  by  correctly  gauging  what  it  is  that 
people  will  pay  for;  and  what  industries  will  therefore  be 
profitable ;  and  what  managers  will  be  able  to  repay  loans ; 
and  thus  to  what  enterprises  funds  can  safely  be  apportioned. 

PROBLEMS 

1.  "The  business  manager  is  not  the  only  person  who  uses  the  in- 
stitutions connected  with  the  work  of  the  pecuniary  unit."  Name 
some  of  these  institutions.     Who  else  uses  them  ? 

2.  Write  out  a  definition,  with  illustrations,  of  working  capital; 
of  fixed  capital. 

3.  Make  a  list  of  the  ways  in  which  the  business  man  can  secure 
funds  for  carrying  on  the  business. 

4.  "I  am  a  retailer  of  general  merchandise.  I  buy  on  November  1, 
$3000  worth  of  goods  for  sale  during  the  holiday  season."  For  how 
long  a  period  of  time  ought  my  promissory  note  to  the  bank  run? 
Why? 

5.  "I  am  a  farmer  and  I  buy  farm  machinery  costing  $500  with 
which  to  grow  and  harvest  my  crops."  For  how  long  a  time  should 
the  note  to  the  bank  run  ? 

6.  What  will  be  the  result  if  I  show  bad  judgment  in  deciding  how 
long  my  note  ought  to  run  ?  What  is  the  form  of  note  which  the  bank 
will  want? 

7.  When  a  man  puts  a  note  in  the  bank  he  is  sometimes  asked  to 
get  it  indorsed.    What  is  an  indorsement  ?    Why  does  the  bank  ask  it  ? 

'  Clay,  Economics  for  the  General  Reader,  Am«rican  edition,  p.  194. 


370  OUR  ECONOMIC   ORGANIZATION 

8.  Banks  often  make  loans  where  they  require  the  borrower  to 
deposit  some  collateral  security  with  the  bank,  in  addition  to  the 
promissory  note.  What  is  collateral  security?  Of  what  is  it  com- 
posed ? 

9.  Henry  T.  Crouch  of  Erie  buys  $1275  worth  of  wheat  from 
T.  C.  Craig  of  Detroit. 

(a)  Suppose  settlement  to  be  effected  with  a  wheat  bill  of  exchange 
(also  called  a  sight  draft)  and  write  out  the  substance  of  the  bill  which 
would  be  used. 

(b)  Suppose  settlement  to  be  made  with  a  check.  Write  out  a 
facsimile  (in  substance). 

(c)  Suppose  settlement  to  be  made  with  a  bank  draft.  Write  out 
a  facsimile  (in  substance). 

10.  Find  out  from  the  financial  statement  of  some  local  bank  with 
which  you  are  familiar  how  they  have  used  their  funds.  What  per- 
centage has  been  invested  in  short-time  promissory  notes?  What 
percentage  has  been  invested  in  stocks  and  bonds? 

11.  From  this  financial  statement  find  out  how  much  cash  reserve 
this  bank  has  in  proportion  to  its  deposits.  Suppose  that  a  bank  has 
$500,000  of  cash  on  hand.     How  much  may  it  safely  lend  ? 

12.  It  is  sometimes  said  that  a  banker  is  in  a  position  to  control  the 
business  of  his  community  through  his  control  of  the  purse  strings. 
He  can  make  or  break  any  business  man.  Do  you  believe  that  this  is 
true?  Can  a  banker  misuse  his  power  with  safety  or  would  he  lose 
in  the  long  run  if  he  did  not  treat  everybody  fairly? 

13.  A  business  man  recently  complained,  "It  is  the  banks  that  keep 
me  from  making  a  fortune.  I  am  never  able  to  secure  funds  enough  to 
finance  the  ventures  which  I  wish  to  start."  Do  you  think  the  banks 
may  be  working  for  his  best  interests  in  refusing  him  extensive  credit  ? 
For  society's  interest  ? 

14.  Does  it  seem  to  you  reasonable  that  a  bank  contemplating 
making  a  loan  to  a  business  firm  should  inquire  into  the  financial  stand- 
ing of  the  firm  ;  into  its  past  history ;  into  the  reputation  of  the  owners 
and  managers;  into  the  way  in  which  the  business  is  conducted? 
Why,  in  each  case? 

15.  Enumerate  the  services  performed  by  the  commercial  bank. 

16.  Define  a  commercial  bank,  a  savings  bank,  a  trust  company,  and  a 
bond  house.    Some  banks  do  several  different  kinds  of  business.    Why? 


FINANCIAL   ORGANIZATION  371 

17.  "1  am  a  manufacturer.  1  need  $5000  with  which  to  enlarge 
ray  factory."  For  how  long  a  time  do  you  suppose  a  bond  issued  for 
this  purpose  might  run  ? 

18.  "The  savings  bank  and  the  insurance  company  develop  thrift." 
What  does  this  mean?     If  true,  what  is  its  significance? 

19.  What  is  a  stock  broker?  What  advantages  to  a  corporation 
are  there  in  using  a  broker  for  selling  new  shares  ? 

20.  "The  corporation,  the  bond  house,  the  stock  exchange,  savings 
banks,  and  insurance  companies  unite  in  assembUng  capital  for  modern 
business  enterprise . ' '     How  ? 

21.  Show  in  what  ways  each  of  our  financial  institutions  contributes 
to  making  available  a  greater  quantity  of  goods  to  apply  to  human 
wants. 

22.  Does  the  pawnbroker  conduct  a  financial  institution?  Does 
the  government  maintain  any  financial  institutions  ? 

23.  What  is  meant  by  book  credits?  checks?  promissory  notes? 
drafts?  bills  of  exchange?  the  bank  note?  bonds?  stocks?  mort- 
gages? public  credit?  personal  credit?  mercantile  credit?  industrial 
credit  ? 

24.  Is  there  any  reason  why  you  should  prefer  to  put  your  money 
in  a  savings  bank  rather  than  invest  it  in  bonds  offered  by  a  bond 
house  ? 

25.  Where  would  you  be  able  to  sell  securities  which  you  own  if 
there  were  no  such  institution  as  the  stock  exchange  ? 

26.  Do  you  suppose  that  large  investors  are  guided  in  their  invest- 
ments by  the  quotations  of  stocks  and  bonds  on  the  exchanges?  Can 
you  see  any  social  importance  m  this  ? 

27.  Watch  the  financial  page  of  a  daily  paper  for  a  few  days  and 
find  out  what  general  movements  take  place  in  the  stock  market. 
Watch,  also,  the  number  of  sales  and  price  movements  of  some  one 
stock,  for  instance  U.  S.  Steel,  Common. 

28.  A  man  recently  proposed  to  a  friend  that  the  friend  subscribe 
for  stock  in  a  corporation  which  was  being  organized.  The  friend 
rephed,  "1  beheve  this  is  a  good  proposition.  I  have  S10,000  to  in- 
vest but  I  may  need  it  for  other  purposes  within  a  year  or  two.  I 
cannot  therefore  subscribe  for  this  stock  as  I  do  not  wish  to  have  my 
money  tied  up."     What  is  the  proper  reply  to  this  statement? 


372  OUR  ECONOMIC   ORGANIZATION 

29.  How  does  the  stock  exchange  make  investment  easy?  How 
does  it  bring  to  a  focus  information  concerning  corporate  securities? 

30.  What  is  meant  by  saying  that  the  stock  exchange  is  a  sort  of 
measuring  stick  for  finding  out  to  what  kinds  of  enterprises  social  re- 
sources may  profitably  be  directed  ? 

31.  "The  stock  exchange  contributes  to  a  closer  adjustment  of  pro- 
duction to  consumption ;  of  the  world's  work  to  the  world's  need." 
Explain  in  detail  how  it  contributes  to  this  end. 

32.  Some  of  the  alleged  advantages  of  credit  are  that : 
(a)  It  utilizes  small  savings. 

(6)  It  furnishes  a  strong  motive  for  saving. 

(c)  It  transfers  capital  to  more  productive  uses. 

(d)  It  offers  to  persons  of  recognized  capacity,  but  without  adequate 
means  of  their  own,  an  opportunity  to  engage  in  work  for  which  they 
are  fitted. 

(e)  It  makes  possible  great  enterprises. 

(/)   It  saves  social  energy  by  providing  a  cheap  medium  of  exchange. 

Some  of  the  alleged  disadvantages  are  that : 

(a)  It  may  promote  extravagance. 

(6)  It  may  transfer  wealth  to  less  productive  hands. 

(c)  It  may  overstimulate  prices. 

(d)  It  may  make  unsound  speculation  easier  to  accomplish  and  may 
result  in  crises. 

Explain  how  credit  may  produce  each  of  these  alleged  effects. 

33.  "Our  financial  devices  and  institutions  greatly  facilitate  the 
apportionment  of  our  productive  resources  to  the  wants  of  society." 
Explain. 

34.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  304r-310,  Selections 
120-140. 
Bureau  of  Education,  Lessons  in  Community  and  National  Life : 
Series    A,  Lesson    A'-21,  Moulton,  "Borrowing    Capital    for 
Modern  Business." 
Lesson   A-22,   Moulton,   "The   Commercial   Bank 
and  Modern  Business." 


STUDY  XXI 

THE  TASKS  OF  THE  BUSINESS  ENTERPRISER  IN 
MEETING  RISKS 

PURPOSES  OF  THIS  STUDY: 

1.  To  svirvey  some  of  the  risks  that  exist  in  modem  speculative  society. 

2.  To  observe  some  of  the  devices  that  are  used  in  meeting  these  risks. 

Since  we  rely  so  largely  upon  individual  initiative  of  organi- 
zers to  bring  about  a  "  good  "  apportionment  of  society's  pro- 
ductive resources,  and  since  the  organizers  play  such  a  large 
part  in  our  economic  system,  it  is  worth  while  for  us  to  get 
a  view  of  the  risks  they  meet  and  how  they  meet  them. 

Some  risks  arise  from  natural  causes.  —  Easily  understood 
by  every  one  are  the  risks  coming  from  so-called  "  natural " 
causes  such  as  storms,  earthquakes,  fire,  and  disease.  These 
risks  would  appear  in  any  form  of  society.  They  were  present 
in  the  medieval  manor ;  they  are  with  us  to-day ;  they  would 
exist  under  communism  or  socialism.  Man  can  only  develop 
devices  to  enable  him  to  predict  them  and  prepare  for  them 
as  well  as  may  be,  to  control  them  as  far  as  possible,  and  to 
soften  their  blows  upon  the  individual  by  some  form  of  insurance. 

Many  of  these  so-called  natural  risks  would  cease  to  be  risks, 
or  would  at  least  be  milder  risks,  if  the  business  organizers  were 
informed  of  certain  natural  laws.  For  example,  a  stock  raiser 
owns  much  capital  in  the  form  of  cattle,  swine,  and  horses.  All 
of  these  are  subject  to  disease.  A  farmer's  drove  of  hogs  is 
frequently  attacked  by  the  cholera  and  in  a  few  days  or  weeks 
none  are  left  alive.  Black-leg  may  attack  his  cattle  and  leave 
him  with  a  serious  loss.  Such  capital  losses  are  largely  matters 
of  his  ignorance,   for  knowledge  of  how  to  cope  with   such 

373 


374  OUR  ECONOMIC   ORGANIZATION 

situations,  in  a  measure  at  least,  is  available.  Socially,  of 
course,  this  is  a  serious  matter.  It  is  upon  the  crops  of  the 
farmer,  and  the  herds  of  the  stock  drover,  that  we  depend  for 
food  supply.  If  these  are  lost,  society  suffers,  no  matter  if  the 
individual  concerned  has  been  protected  by  some  form  of 
insurance. 

Changes  in  consumers'  wants  mean  risks.  —  In  addition  to 
these  "  natural"  risks  there  are  risks  growing  out  of  the  nature 
of  modern  business  activity  and  modern  economic  society. 
There  are,  for  example,  the  risks  arising  from  changes  in  con- 
sumers' wants.  Men  invest  their  money  in  business  to  satisfy 
people's  wants  and  in  hope  of  making  a  profit.  They  build 
stores  and  factories,  purchase  machinery  and  tools  to  make 
the  goods  which  people  demand,  but  when  people's  wants 
change,  especially  if  the  change  comes  suddenly,  the  business 
venturer  is  likely  to  suffer  a  loss.  Changes  in  fashion  are  per- 
haps the  best  illustration  of  quick  changes  in  people's  wants. 
A  milliner  may  buy  a  large  stock  of  hats  for  a  given  season. 
These  are  capital.  If  she  does  not  succeed  in  selling  them 
during  the  season  they  are  in  fashion,  they  become  a  drug  on 
the  market,  as  the  desired  mode  is  likely  to  be  quite  different 
the  following  year.  Style,  or  fashion,  has  very  much  to  do  with 
the  hats  we  want,  with  the  clothing  we  buy,  the  shoes  we 
purchase.  It  dictates  the  kind  of  cloth,  the  cut,  the  lining,  and 
the  design  that  is  used  in  nearly  all  our  articles  of  apparel. 
These  quick  fashion  changes  in  certain  wants  cause  risks  to 
confront  business  men  who  are  attempting  to  satisfy  them  and 
make  it  a  highly  speculative  venture  to  own  many  of  the  goods 
themselves,  or  to  own  much  capital  which  can  be  used  to  make 
only  such  types  of  goods.  The  attempt  to  reduce  such  risks 
causes  mei'chants  to  advertise  "  overstocked  sales  "  and  "  after- 
season  sales."  These  sales  are  efforts  to  "unload"  before  a 
change  in  style  makes  the  goods  worthless. 

People's  wants  often  change  from  other  causes  than  fashion's 
dictates.  For  instance,  an  unusually  warm  winter  or  a  cool 
summer  may  bring  failures  to  merchants  who  have  overstocked 


RISK-BEARING  BY  THE  ENTERPRISER  375 

their  shelves  with  goods  which  usually  sell,  and  to  coal  and  ice 
dealers  who  find  no  demand  for  their  wares.  In  other  words, 
"  natural "  causes  often  explain  the  fact  that  the  consumers' 
wants  are  different  from  what  might  reasonably  have  been 
expected. 

No  matter  what  may  explain  a  change  in  the  consumers' 
wants,  the  change  is  likely  to  mean  a  loss  to  the  risk-taking 
business  man  concerned.  This  is  pretty  certain  to  mean  a  loss 
to  society  as  well  in  the  sense  that  labor  and  materials  have 
been  apportioned  to  an  enterprise  that  society  has  ceased  to 
care  for.  Very  frequently  it  is  not  possible  to  shift  these  social 
resources  to  meet  society's  new  wants,  without  loss  in  the 
shifting  process. 

Risks  caused  by  changes  in  methods.  —  Changes  in  methods 
of  production  and  marketing  may  readily  mean  losses.  Men 
devise  new  ways  of  doing  things.  New  tools  are  invented,  new 
machines  are  made,  a  new  transportation  system  is  planned 
which  is  superior  to  the  old  one.  Machinery',  tools,  factories, 
and  transportation  lines  which  have  cost  a  great  deal  of  ma- 
terial and  effort  sometimes  become  a  total  waste,  useful  only 
for  the  junk  pile,  as  a  result  of  changes  in  methods.  For  ex- 
ample, when  the  power  looms  for  weaving  were  invented,  the 
hand  looms  used  by  the  weavers  in  England  and  other  countries, 
which  were  valuable  capital  until  the  new  method  was  invented, 
were  of  little  use.  These  forms  of  capital  goods  went  to  the 
scrap  pile  or  the  kindling  box  or  the  attic,  to  be  kept  as  relics 
of  by-gone  days.  A  new  machine  technique  in  weaving  had 
replaced  the  old  capital.  When  the  automobile  was  perfected, 
many  of  the  factories  which  had  been  used  to  make  carriages 
and  wagons  became  of  little  value.  Some  wagon  factories 
went  out  of  business,  others  remodeled  and  reorganized  their 
equipment  to  make  automobiles.  They  could  no  longer  use 
it  at  a  profit  in  manufacturing  horse-drawn  vehicles.  It  is  de- 
clared that  when  the  Suez  Canal  was  built,  sailing  vessels  of 
more  than  two  million  tons'  capacity,  that  formerly  made  the 
trip  to  India  around  the  Cape  of  Good  Hope,  were  not  adapted 


376  OUR  ECONOMIC   ORGANIZATION 

to  use  on  the  new  route  and  their  value  fell  greatly.  A  change 
in  method  had  made  these  old  forms  of  capital  less  useful. 

Such  changes  may  result  in  losses  for  persons  who  had  noth- 
ing to  do  with  the  change.  For  example,  it  is  said  that  when 
the  large  mail  order  houses,  such  as  Montgomery,  Ward  and 
Company,  and  Sears,  Roebuck  and  Company,  grew  up  they 
caused  serious  losses  to  many  storekeepers  in  small  towns.  The 
wholesalers  from  whom  these  local  stores  purchased  goods,  the 
manufacturers  from  whom  these  wholesalers  purchased,  as  well 
as  those  banks  with  whom  these  concerns  transacted  business 
suffered  also.  There  is  nothing  new  for  us  in  such  a  story. 
It  is  merely  another  illustration  of  the  development  of  new 
processes  and  of  new  forms  of  organization  through  the  competi- 
tive struggle  of  the  enterprisers  who  undertake  to  guide  the 
apportionment  of  society's  resources. 

Risks  caused  by  industrial  disputes.  —  Factories,  machines, 
railroads,  wharves,  ships,  and  other  capital  goods  are  often  idle 
because  of  the  inability  of  their  owners  and  the  workers  to  agree. 
In  normal  years  these  strikes  and  lockouts  may  number  in  the 
United  States  alone  from  two  to  three  thousand,  affecting  from 
eight  to  fifteen  thousand  establishments  and  half  a  million 
workers. 

Risks  growing  out  of  the  interdependence  of  industrial 
society.  —  We  have  seen  repeatedly  that  our  modern  method 
of  producing  goods  is  one  involving  specialization,  cooperation, 
and  interdependence.  This  interdependence  exposes  our  risk- 
takers  to  some  very  serious  problems.  What  happened  to 
a  certain  cotton  planter  well  illustrates  this  matter. 

This  Mississippi  cotton  planter  had  for  years  raised  cotton 
at  the  cost  of  about  nine  cents  per  pound  which  he  sold  to 
a  "  local  buyer  "  in  a  near-by  town.  The  local  buyer  in  turn  sold 
it  to  a  New  Orleans  agent  of  a  New  York  firm,  and  finally  it 
reached  the  cloth  manufacturers  of  England,  France,  or  New 
England. 

In  1914  while  this  planter  was  going  about  his  tasks  in  the 
usual  way  events  far  from   him  were   shaping  themselves  in 


RISK-BEARING  BY  THE   ENTERPRISER  377 

such  a  way  as  to  make  much  that  he  had  spent  for  tools,  labor, 
and  seed  profitless.  Late  in  July  of  1914  the  great  World 
War  began  in  Europe.  In  consequence,  English,  French,  and 
German  merchants  refused  to  buy  new  supplies  of  cotton  cloth. 
They  did  not  know  how  the  war  might  affect  their  customers. 
Some  would  be  at  the  front,  others  out  of  work,  and  all  would 
be  economical  in  their  purchases.  As  a  result,  cloth  manu- 
facturers in  Europe  did  not  order  cotton  from  the  exporters  in 
the  United  States.  Naturally,  the  exporters  would  not  buy 
a  great  deal  of  cotton  from  the  local  buyers  in  the  cotton 
districts.  Almost  as  soon  as  the  cotton  planter  heard  of  the 
war  he  learned  that  the  local  cotton  buyers  were  offering  a  lower 
price  for  cotton.  During  the  following  weeks  the  price  fell 
lower.  At  times,  buyers  refused  to  state  any  price.  Finally, 
however,  near  the  first  of  December  this  planter  was  able  to 
sell  his  cotton  at  a  price  of  six  cents  a  pound.  Instead  of 
making  the  profit  that  he  had  anticipated,  he  sustained  a  loss 
of  three  cents  for  every  pound  of  cotton  he  raised. 

No  one  in  particular  was  to  blame  for  the  losses  of  this  planter. 
They  grew  out  of  the  fact  that  he  was  producing  for  an  "  un- 
known" market.  His  success  or  failure  depended  upon  factors 
over  which  he  had  no  control. 

These  factors  affected  many  others  besides  this  planter. 
When  the  price  of  cotton  fell,  the  storekeepers  in  the  cotton 
belt  knew  that  the  planters  would  be  unable  to  buy  the  usual 
amounts  of  clothing,  shoes,  and  other  necessities  and  luxuries. 
As  a  result  they  refused  to  purchase  goods  from  manufacturers. 
One  Chicago  shoe  salesman  who  usually  spent  two  months 
taking  orders  from  Southern  storekeepers  covered  the  territory 
in  two  weeks.  Many  merchants  in  the  South  failed  in  business, 
and  as  they  could  not  pay  their  bills,  their  creditors  —  banks 
from  which  they  had  borrowed  and  merchants  from  whom  they 
had  bought  goods  —  were  in  some  cases  forced  into  bankruptcy. 
Factories  in  turn  from  whom  merchants  purchased  found  busi- 
ness dull  and  in  some  instances  closed  their  doors.  Thus  there 
spread  over  the  South,  and  extended  to  many  businesses  in  the 


378  OUR  ECONOMIC   ORGANIZATION 

North,  a  condition  that  is  called  a  business  depression.  Manu- 
facturers, banks,  farmers,  and  merchants  were  all  affected. 
Yet  they  were  in  no  way  to  blame.  The  cause  lay  in  the  fact 
that  they  were  specialists  and  were  dependent  on  other  special- 
ists. All  being  interdependent,  the  disturbance  had  spread 
rapidly  to  all  of  them  and  brought  with  it  ruin  and  loss. 

Sometimes  such  business  depressions  are  much  more  severe 
and  affect  the  entire  country.  Thousands  of  factories  close  their 
doors,  allowing  the  machinery  which  they  contain  to  lie  idle. 
Railroads  having  few  goods  to  carry,  are  not  used  to  anything 
like  their  full  capacity.  All  of  this,  of  course,  represents  a  great 
waste.  The  factory  buildings  and  machines  —  which  are 
capital  —  produce  nothing  and  deteriorate  while  idle.  The 
railroads  wear  out  almost  as  fast  when  not  in  use  as  when 
traffic  is  being  carried,  and  thus  there  is  a  waste  of  capital 
when  they  are  not  used  to  the  Hmit.  These  depressions  some- 
times last  for  months  and  even  years  before  the  readjustments 
come  which  again  call  for  the  use  of  all  the  capital  which 
society  has  built. 

Technological  industry  increases  risk.  —  The  risks  arising 
from  the  foregoing  causes  are  the  more  difficult  to  meet  because 
of  the  technological  character  of  modern  industry.  In  these 
days,  money  is  invested  in  fixed  or  specialized  capital  such  as 
machinery,  railroads,  and  buildings.  This  means  that  produc- 
tive energy  has  taken  a  form  which  cannot  be  changed  without 
waste  and  loss.  A  knitting  machine,  for  example,  can  be  used 
for  but  the  one  purpose.  If  not  used  for  that,  it  must  stand 
idle.  If  the  idleness  continues  for  a  long  time,  it  will  certainly 
deteriorate  and  perhaps  ultimately  it  must  be  scrapped.  This 
means  a  loss  to  the  owner  and  a  waste  to  society  in  that  there 
are  unused  resources.  If  these  capital  goods  could  be  shifted 
readily  to  another  use,  the  loss  would  not  be  so  great,  but  this 
is  not  possible  with  highly  specialized  productive  instruments. 
The  cloth  manufacturers  of  England  and  France  in  the  case  just 
mentioned  realized  this  to  the  full.  In  building  their  factories, 
they  had  made  capital  investments.     When  no  oi'ders  for  cloth 


RISK-BEARING  BY  THE  ENTERPRISER 


379 


came,  their  machines  and  buildings  were  idle.  Also,  the  cotton 
exporting  companies  in  New  Orleans  and  other  cities  had  built  up 
the  trade  connections  of  their  business.  They  had  established 
offices  in  this  and  other  countries ;  they  had  installed  furniture, 
telephones,  and  workers.  They  found  that  their  great  organi- 
zations had  now  little  work  to  do.  Heavy  losses  to  the  owners 
were  the  result.  Nor  was  society  gaining  from  this  idle  capital 
and  organization. 

Risks  reflected  in  business  failures.  —  This  list  of  the  sources 
of  risk  is  surely  an  impressive  one  and  is  indicative  not  only  of 
the  difficulty  of  the  task  of  the  manager  in  modern  society,  but 
also  of  some  of  the  wastes  which  occur  in  our  productive  re- 
sources. Think,  for  example,  of  the  waste  of  capital  alone. 
It  is  impossible  to  add  together  the  various  losses  of  capital 
which  are  caused  by  all  of  the  risks  which  we  have  studied. 
How  much  capital  is  wasted  through  being  idle,  how  much 
as  a  result  of  changes  in  wants,  how  much  as  a  result  of  seasonal 
fluctuations,  how  much  as  a  result  of  interdependence,  it  is 
quite  impossible  to  compute.  Nor  is  it  easier  to  determine 
how  much  capital  society  has  lost  in  the  process  of  gaining  by 
new  methods  of  organization,  or  by  new  methods  of  technique. 
We  can,  however,  realize  easily  that  the  total  losses  are  severe. 

One  indication  of  the  serious  risks  involved  is  the  number  of 
business  men  who  fail  each  year.  R.  G.  Dun  and  Co.,  an  organi- 
zation which  compiles  such  data,  give  the  following  statement 
concerning  business  failures  in  the  United  States  in  recent  years  : 


Year 

No.  OP 

Failures 

No.  OP  Business 
Concerns 

Per  Cent  of 
Failures 

1918 

1917 

1916 

1915 

1914 

1913 

1912 

1911 

9,982 
13,855 
16,993 
22,156 
18,280 
16,037 
15,452 
13,441 

1,708,061 
1,733,225 
1,707,639 
1,674,788 
1,655,496 
1,616,517 
1,564,279 
1,525,024 

.58 
.80 
.99 
1.32 
1.10 
.99 
.98 
.81 

380  OUR  ECONOMIC   ORGANIZATION 

The  Bradstreet  Company  makes  an  estimate  of  the  causes 
of  faikn-e,  which,  while  necessarily  inadequate  and  open 
to  criticism,  nevertheless  throws  an  interesting  light  on  our 
discussion  of  the  forms  of  risk : 

A.  Due  to  Faults  of  Those  Failing  (74-86%  of  total) 

Incompetence  (irrespective  of  other  causes) 
Inexperience  (without  other  incompetence) 
Lack  of  Capital 
Unwise  Credits 

Speculation  (outside  regular  business) 
Neglect  of  Business  (due  to  doubtful  habits) 
Personal  Extravagance 
Fraudulent  Disposition  of  Property 

B.  Not  Due  to  Faults  of  Those  Failing  (14-26%  of  total) 

Specific  Conditions  (disaster,  war,  floods,  etc.) 
Failures  of  Others  (of  apparently  solvent  debtors) 
Competition 

Since  institutions  develop  to  meet  needs,  we  should  expect 
to  find  that  there  are  various  institutions  and  devices  designed 
to  be  of  aid  to  the  manager  in  the  risks  he  takes.  And  this  is 
actually  the  case. 

Advertising  may  lessen  risks  of  the  entrepreneur.  —  One 
very  important  method  which  is  used  by  manufacturers  and  mer- 
chants to  do  away  with  the  risks  which  come  from  the  changes  of 
people's  wants  is  advertising.  By  advertising  business  men 
can  in  a  large  measure  control  people's  wants.  They  set  the 
fashion  for  us.  They  make  us  desire  clothes  of  the  cut  which 
they  manufacture,  talking  machines  of  the  sort  they  sell,  and 
automobiles  of  the  style  they  make.  In  so  far  as  the  advertiser 
can  cause  people  to  want  what  he  offers  to  sell,  he  is  lessening 
the  speculation  and  risk  that  come  to  him  from  changing  wants. 
In  so  far  as  the  advertiser  can  control  wants,  he  can  tell  with 
greater  accuracy  the  amount  of  capital  which  he  will  need  to 
supply  wants,  and  thus  he  will  be  less  likely  to  waste  capital  by 
having  an  oversupply.  Of  course,  it  does  not  always  follow 
that  the  welfare  of  society  is  promoted  by  advertising.     Un- 


RISK-BEARING  BY  THE  ENTERPRISER  381 

worthy  wants  may  be  developed  ;  a  poor  quality  of  goods  well 
advertised  may  drive  out  a  good  quality  which  is  not  advertised. 
Or  by  advertising  our  wants  may  be  changed  so  frequently  that 
much  fixed  capital  and  many  old  methods  become  useless. 

Risks  are  reduced  through  speculative  contracts.  —  During 
the  first  year  in  which  America  participated  in  the  Great  War, 
a  Michigan  ship-building  firm  received  a  government  order  for 
ships.  The  order  was  so  large  that  the  firm  had  to  increase  its 
yards  and  this  would  take  several  months.  They  did  not  wish 
to  buy  all  the  necessary  lumber  in  advance  and  store  it  until 
needed,  but  if  they  did  not  do  so,  they  faced  the  possibihty  of  a 
rise  in  the  price  of  lumber  which  would  eat  up  the  profits  in  their 
government  order.  To  insure  themselves  against  this,  the 
ship-building  concern  made  a  contract  with  a  large  lumber  pro- 
ducer in  which  he  agreed  to  deliver  them  from  time  to  time  the 
grade  and  quality  of  lumber  desired  at  a  specified  price.  He 
took  the  risk  connected  with  a  possible  rise  in  prices.  Thus 
by  a  contract  the  ship-builders  secured  themselves  against  loss. 
They  reduced  their  risk  involved  in  building  their  new  plant. 

Or,  take  another  illustration.  Suppose  that  a  contractor 
agrees  to  build  a  house  for  you  for  $15,000.  It  would  seem  at  first 
that  he  assumes  all  the  risks  of  securing  lumber,  cement,  stone, 
brick,  plaster,  and  other  building  materials.  As  a  matter  of 
fact,  he  contracts  himself  out  of  all  of  these  risks  by  making 
contracts  with  other  persons  to  furnish  them.  One  might 
argue  that  the  total  risk  involved  is  as  great  as  it  was  before  ; 
that  it  has  simply  been  passed  from  the  contractor  to  others. 
This  is  not  true,  however.  The  men  who  now  assume  the 
risks  are  each  specialists  who  know  much  better  than  the  con- 
tractor where  the  supply  of  these  goods  is  to  be  found  and 
the  prices  that  should  be  paid  for  them.  The  total  risk  is, 
therefore,  less  than  if  it  were  assumed  by  one  non-specialized 
man. 

Hedging  operations  are  speculative  contracts.  —  Probably 
the  speculative  contract  reaches  its  highest  development  in  the 
"  hedging  "  operations  of  the  Board  of  Trade.     The  Board  of 


382  OUR   ECONOMIC   ORGANIZATION 

Trade  is  a  market  where  buyers  and  sellers  of  grain,  cotton,  and 
similar  goods  trade.  They  buy  antl  sell  either  for  immediate 
delivery,  or  for  delivery  some  time  in  the  future,  and  their  serv- 
ices are  often  used  by  persons  who  wish  to  avoid  certain  risks. 
Suppose  a  miller  buys  to-daj^  for  immediate  delivery  10,000 
bushels  of  wheat  which  he  expects  to  grind  and  have  ready  to 
market  as  flour  two  months  hence.  If  now  the  prices  of 
wheat  and  flour  should  fall  considerably  in  these  two  months, 
the  miller  would  lose  heavily.  Of  course,  if  the  prices  should 
rise,  he  would  make  gains.  The  miller  is  no  gambler.  His 
business  is  that  of  grinding  wheat  and  not  that  of  speculating 
on  the  rise  or  fall  of  the  price  of  his  raw  material.  Accordingly, 
he  "  hedges  "  on  his  raw  material  costs.  Through  a  broker  on 
the  Board  of  Trade,  he  sells  another  10,000  bushels  of  wheat 
which  he  does  not  own  (in  the  language  of  the  market  he  "  sells 
short  ")  agreeing  to  deliver  three  months  hence.  What  he  has 
really  done  is  not  sell  as  w^e  ordinarily  think  of  the  term,  but 
contract  to  deliver  in  the  future.  When  the  three  months  have 
passed,  he  buys  10,000  bushels  and  makes  delivery.  If  wheat 
prices  have  risen,  he  loses  on  his  wheat  "  deal  "  but  this  loss 
is  offset  by  the  corresponding  rise  in  flour.  If  wheat  prices 
have  fallen,  he  gains  on  his  wheat  deal  but  loses  by  the  corre- 
sponding fall  in  floiu'.  He  thus  frees  hims(>lf  from  the  risk  of 
price  movements  in  his  raw  material  and  confines  himself  to  his 
"  manufacturer's  profit."     Such  operations  are  very  common. 

Some  risks  may  be  met  by  insurance.  —  Of  the  many  methods 
which  have  been  devised  to  lessen  risks,  and  especially  the  risks 
of  capital,  insurance  is  one  of  the  most  important.  Large  com- 
panies have  been  formed  which  make  careful  calculations  con- 
cerning the  chances  of  losses  from  various  causes.  On  the  basis 
of  their  calculations,  these  companies  take  small  payments 
called  premiums,  from  a  great  number  of  persons  and  from 
the  total  of  these  repay  losses  that  occur  to  any  of  the  insured. 
By  means  of  insurance,  business  men  may  now  largely  eliminate 
their  financial  risks  that  come  from  fire,  wind,  rain,  hail,  light- 
ning, theft,  wreck,  accident,  illness,  and  death. 


RISK-BEARING  BY  THE  ENTERPRISER  383 

Of  course  when  capital  goods,  such  as  a  factory,  are  destroyed 
by  fire,  the  fact  that  the  insurance  company  pays  the  owner 
somewhere  near  the  worth  of  the  factory  docs  not  replace  it. 
Before  the  fire,  society  possessed  a  factory ;  now  it  is  gone. 
It  is  sometimes  argued,  therefore,  that  insurance  does  not 
lessen  risks  but  merely  passes  them  from  one  person  to  other 
persons ;  merely  distributes  them  from  one  person  to  a  group. 
This  is  true,  but  there  is  a  sense  in  which  insurance  does  lessen 
risks  by  diminishing  the  waste  which  comes  from  the  destruction 
of  capital.  A  factory  which  burns,  for  instance,  may  be  the 
only  property  of  its  owner.  If  he  is  impoverished,  he  cannot  re- 
build ;  his  employees  are  out  of  work ;  the  industries  which 
depend  upon  him  for  materials  are  not  supplied,  and  the  indus- 
tries from  which  he  purchased  will  find  one  of  their  customers 
gone.  The  loss  of  his  factory,  if  it  is  not  immediately  rebuilt, 
will,  therefore,  cause  a  serious  dislocation  and  unstabilizing  of 
business.  Insurance  which  gives  him,  immediately,  money 
enough  to  rebuild  his  factory  lessens  the  business  dislocation 
and  decreases  the  shock.  In  this  steadying  influence  of  insur- 
ance lies  its  greatest  function  as  a  reducer  of  risks  and  wastes. 

Increase  of  knowledge  lessens  risks.  —  Many  of  the  diffi- 
culties of  the  enterpriser  arise  from  his  inability  to  foresee  and 
make  provision  against  what  the  future  may  have  in  store  for 
him.  It  follows  accordingly  that  the  increase  of  knowledge 
is  one  of  the  most  fruitful  ways  of  diminishing  risk. 

Many  institutions  and  devices  have  grown  up  to  aid  organ- 
izers in  estimating  future  situations.  Some  of  these  are  useful 
to  almost  every  business.  Some  are  most  useful  to  men  who 
are  interested  in  making  new  capital.  Some  are  of  importance 
to  organizers  who  are  producing  food  and  other  consumers' 
goods.  Some  of  these  agencies  have  been  organized  by  the 
government.  Some  have  been  built  up  by  individuals  who  saw 
a  profit  in  providing  organizers  with  the  information  they 
wished.  Still  other  mechanisms  for  information  gathering 
have  been  devised  directly  by  the  men  who  wanted  this  knowl- 
edge.    It  is  not  possible  for  us  to  do  more  than  examine  the 


384  OUR  ECONOMIC   ORGANIZATION 

work  of  a  few  of  these  agencies,  such  as  the  Board  of  Trade, 
government  crop  reports,  the  consular  service,  commercial 
agencies,  business  research  agencies,  trade  journals,  and  engineer- 
ing schools. 

The  Board  of  Trade  performs  services.  —  The  Board  of 
Trade,  being  an  association  of  buyers  and  sellers,  maintains  an 
information  service.  Private  agencies  use  telegraph,  tele- 
phone, cable,  and  mail  to  center  at  the  Board  of  Trade  a 
world-wide  information  service,  concerning  the  commodities  in 
which  its  members  deal.  This  information  becomes  available 
for  the  use  of  all  and  is  of  great  importance  not  only  to  these 
dealers,  but  also  to  farmers,  millers,  exporters,  and  many  others. 

The  following  quotations  show  the  sort  of  information  which 
reaches  the  organized  grain  exchanges.  They  are  taken  from 
what  is  known  as  the  "  broad  tape."  The  "  broad  tape  "  is 
a  strip  of  paper  some  five  inches  wide  which  unrolls  from  an 
electrically  operated  printing  machine  known  as  the  "  ticker." 
The  "  ticker  "  prints  upon  this  strip  of  paper  news  concerning 
crops  and  other  matters  which  is  gathered  by  a  corps  of  agents, 
delivered  to  a  central  office,  and  from  there  transmitted  to  the 
"ticker"  by  electricity  and  printed  simultaneously  in  all  offices 
possessing  a  "  ticker."  A  glance  at  the  information  on  the  tape 
shows  how  useful  it  would  be. 

The  use  of  government  crop  reports.  —  A  source  of  informa- 
tion that  is  very  useful  not  only  to  farmers  but  to  a  great  many 
other  business  men  as  well  is  provided  by  the  national  govern- 
ment in  its  reports  on  crops.  The  government  crop  reports 
give  information  on  all  crops  grown  in  the  United  States  that 
can  be  considered  of  commercial  importance.  In  March  of 
each  year  the  government  issues  a  report  which  states  the 
amount  of  grain  which  is  still  held  on  the  farms  of  the  country. 
In  April  a  second  report  appears  which  deals  with  the  condi- 
tion of  winter  wheat  and  rye.  (These  crops  are  sown  in  the 
fall  and  harvested  the  following  summer.)  In  May  a  third 
report  appears  stating  the  condition  of  winter  wheat,  rye,  and 
of  meadow  lands.     It  also  states  the  portion  of  the  original 


RISK-BEARING  BY   THE  ENTERPRISER  385 


The  government  crop  report  on  corn  and  oats  is 
around  expectations  but  the  total  wheat  crop  is  20 
to  30  million  below  estimates. 

The  government  report  fully  confirms  the  many  sen- 
sational damage  reports  received  during  the  past 
few  weeks. 

Crops  in  Northwest 

Northwestern  miller  special  crop  says  guesses  of 
best-informed  elevator  men  present  conditions  run 
200,000,000  to  225,000,000  bushels  for  three  Canadian 
provinces.  Black  rust  reported  to  be  doing  some 
damage  in  Eastern  Montana. 

Kansas  has  89,000,000  bushels  against  96,000,000 
last  year. 

Liverpool  Grain  Cable 

Wheat  2  to  4^  higher. 
Corn  ^  to  2  higher. 


Foreign  Crop  Summary 

United  Kingdom  —  Wheat  is  now  favorable. 

France  —  Wheat  not  very  favorable. 

Russia  —  Complaints  regarding  the  quality  of  wheat 

were  numerous. 
Argentine — Prolonged  drought  and  continued  cold. 

Much  replanting  necessary. 
India  —  The  monsoon  has  burst  and  afforded  mois- 
ture.     Agricultural    situation    satisfactory. 

Peace  Talk 

Berlin  advises  this  morning  that  preparations  are 
being  made  for  another  winter  campaign. 


]?Kf)AD  Tape  Gossip' 

>  Sections  of  the  "broad  tape"  as  it  came  from  the  ticker  in  a  broker's  office  in  La  Salle 
Street,  Chicago. 


386  OUR   ECONOMIC   ORGANIZATION 

acreage  of  winter  wheat  which  promises  to  produce  a  crop. 
The  June  report  is  concerned  largely  with  the  amount  of  wheat 
which  has  been  sown  in  the  spring.  In  July  the  acreage  which 
has  been  planted  to  corn  is  reported.  The  general  conditions 
of  all  crops  is  reported  until  September,  when  most  of  the 
smaller  grains  have  been  harvested.  The  condition  of  corn 
is  reported  in  October,  and  in  December  appears  a  report  which 
gives  trustworthy  data  on  the  total  amount  of  crops  which  has 
been  harvested. 

In  addition  to  these  reports  the  government  issues  weekly 
weather  reports  which  tell  of  weather  conditions  that  are  likely 
to  influence  crops  favorably  or  unfavorably  in  any  of  the  grain- 
and  cotton-growing  areas.  Many  careful  buyers  on  the  or- 
ganized exchanges  declare  that  the  reports  of  the  weather  con- 
ditions enable  them  to  anticipate  very  closely  the  finally  re- 
ported condition  of  crops. 

It  is  not  difficult  to  see  that  farmers  are  no  more  interested 
in  crop  reports  than  are  scores  of  other  business  organizers. 
The  millers  who  produce  flour  must  rely  on  these  to  estimate 
the  prices  which  they  will  pay  for  grain  in  the  future.  The 
makers  of  corn  products  —  starch,  sirup,  flakes,  —  are  also 
interested  in  these  reports  on  the  conditions  of  the  raw  materials 
which  they  use.  Exporters  who  are  selling  grains  to  foreign 
buyers  watch  these  reports  with  the  greatest  care.  The  busi- 
ness of  railroads  depends  vei;y  greatly  upon  the  amount  of  grain 
which  they  will  carry.  Business  men  in  the  towns  and  cities 
who  manufacture  or  sell  goods  which  are  used  by  farmers  find 
their  market  influenced  very  greatly  by  the  success  which  is 
attending  the  farmers'  efforts  to  produce  crops.  Bankers 
watch  the  crop  reports  closely,  as  their  business  will  be  influenced 
by  the  conditions  in  agriculture  and  in  related  lines. 

What  the  consular  service  does.  —  Many  business  organizers 
wish  to  sell  all  or  part  of  their  goods  abroad.  What  is  the 
demand  in  foreign  countries?  It  would  be  difficult  indeed  for 
an  American  business  man  to  ascertain  foreign  demand  for 
his  goods  without  hiring  a  large  corps  of  agents.     Great  aid  in 


RISK-BEARING  BY   THE   ENTERPRISER  387 

knowing  foreign  demand  is  given  by  a  division  of  the  national 
government  known  as  the  "  consular  service."  The  government 
sends  to  nearly  every  important  city  of  every  country  of  the 
world  men  called  consuls,  who  are  charged,  in  part,  with  the 
duty  of  gathering  facts  and  information  which  will  be  useful 
to  American  business  men.  If  a  new  railroad  is  to  be  built  in 
Japan,  information  concerning  it  is  valuable  to  American 
makers  of  steel  rails,  locomotives,  and  cars,  and  this  fact  would  be 
at  once  reported  through  the  consular  service.  If  a  new  series 
of  public  buildings  is  to  be  erected  in  South  America,  if  new 
mines  are  to  be  opened  in  Mexico,  there  is  an  opportunity  for 
American  organizers  to  sell  goods,  and  it  is  such  information 
which  the  consular  service  gathers  and  reports. 

Businesses  furnish  information.  —  Many  individuals  who 
have  seen  how  important  it  is  for  organizers  to  have  access  to 
information  have  organized  businesses  to  supply  it. 

Among  such  businesses  are  those  which  are  commonly  called 
commercial  agencies,  such  as  R.  G.  Dun  and  Co.  and  the 
Bradstreet  Company.  The  larger  part  of  their  business  is 
that  of  collecting  detailed  information  concerning  the  credit 
standing  of  business  men  in  every  part  of  the  country.  This 
information  is  sold  to  other  business  men  who  wish  to  ascer- 
tain to  whom  it  is  safe  to  sell  goods.  These  commercial 
agencies  also  collect  a  great  deal  of  data  on  the  general  business 
conditions  throughout  the  country,  the  success  which  is  attend- 
ing the  production  of  many  lines  of  goods,  and  the  number  of 
failures  in  various  kinds  of  business.  From  all  this  general 
information  the  man  who  is  thinking  of  entering  business  can 
form  an  opinion  concerning  the  prospects  of  success. 

Work  somewhat  like  that  of  the  commercial  agencies  is  also 
done  for  business  men  by  statistical  companies.  One  of  these 
companies  advertises  as  follows :  ^ 

"Yes,  your  business  is  different.  It  undoubtedly  has  features  not 
possessed  by  most  of  the  corporations  that  now  use  Standard  Daily 
Trade  Service. 

*  This  material  is  taken  from  advertising  literature  of  the  StandaTd  Statistics  Company. 


388  OUR   ECONOMIC   ORGANIZATION 

"  But  it  has  this  in  common  with  them :  it  is  influenced  by  basic 
conditions  of  labor,  production,  transportation,  finance,  and  legislation 
—  here  and  abroad.  Whether  you  wish  or  not,  you  are  now  engaged 
in  World  business,  and  you  cannot  afford  to  miss  any  fact  of  vital 
importance  to  American  business  men  as  a  whole.  All  these  facts 
are  brought  to  you  every  morning  by  the  Standard  Daily  Trade  Service. 

"  What  is  more,  you  have  only  to  list  with  us  your  special  needs  for 
information  along  any  line,  and  we  give  you  our  Personal  Service  on 
it  without  extra  charge  —  and  in  the  strictest  confidence.  Our. 
experienced  staff  will  be  constantly  on  the  watch  for  any  item  of  fact 
that  bears  upon  your  interests  and  will  send  it  to  you. 

"  Whether  it  is  economic  conditions  in  China,  sugar  crop  prospects  in 
Cuba,  developments  in  trading-with-the-enemy  legislation,  or  any 
other  item  of  basic  trade  fact,  small  or  large,  you  can  rely  upon  our 
watching  developments  as  carefully  as  you  would  yourself  if  you  had 
at  your  disposal  all  the  time  and  all  the  sources  of  information  you 
wanted." 

Quite  frequently  advertising  agencies  serve  as  research 
bureaus  for  their  clients.  The  experience  of  a  manufacturer 
of  an  automobile  horn  gives  us  a  good  illustration  of  the  way  in 
which  those  agencies  go  about  their  work.  Before  allowing  the 
manufacturer  to  advertise  his  motor  horn,  the  agency  con- 
cerned undertook  a  careful  investigation. 

1.  They  fii'st  determined  the  possible  amount  of  sales  in  the  country, 

a.  By  learning  the  number  of  motor  cars  in  the  United  States. 

b.  By  learning  the  number  of  motor  cycles  in  the  United  States. 

c.  By  learning  the  number  of  motor  boats  in  the  United  States. 

2.  They  next  determined  the  amount  of  competition  which  they 

would  have  to  meet. 

a.  By  learning  the  number  of  other  factories  making  similar 

products. 

b.  By  deterinining  the  volume  of  the  sales  of  these  companies. 

3.  The  business  policies  of  competitors  were  next  studied  : 

a.  Extent  of  advertising  done  by  competitors. 

b.  Promptness  of  the  service  given  to  purchasers  by  competitors. 

c.  Determining  whether  competitors  sold  through  jobbers  and 

dealers,  direct  to  consumers,  or  how. 


RISK-BEARING  BY  THE  ENTERPRISER  389 

4.  Several  hundred  automobile  accessory  dealers  were  visited  and 
conferred  with  concerning  the  best  plan  for  advertising  and 
marketing  the  new  accessory. 

With  this  information  before  them,  the  advertising  agency- 
was  able  to  advise  the  manufacturer  more  intelligently  con- 
cerning the  advisability  of  manufacturing  the  accessory  and 
the  best  way  in  which  to  sell  it. 

Trade  journals.  —  A  business  man  in  nearly  any  line  of 
business  will  now  find  that  there  is  published  one  or  more 
magazines  which  are  devoted  entirely  to  his  type  of  business. 
There  is,  for  example,  a  magazine  for  candy  makers  and  sellers 
known  as  "  The  Confectioner's  Journal."  "  The  National 
Baker "  is  concerned  with  the  interests  of  bakers.  "  The 
Modern  Miller  "  devotes  itself  to  matters  of  interest  to  flour 
millers.  "  Petroleum  "  talks  of  nothing  that  will  not  interest 
oil  men.  The  "  Midland  Druggist  and  Pharmaceutical  Re- 
view "  is  a  magazine  for  men  in  the  drug  trade.  "  The  Iron 
Age  "  is  printed  for  the  steel  and  iron  trade.  These  magazines 
which  are  devoted  to  special  trades  are  called  trade  journals, 
and  there  are  now  several  thousand  of  them.  All  sorts  of  facts, 
suggestions,  and  data  which  are  of  interest  to  the  business  man 
concerned  are  printed  in  these  trade  journals.  New  methods 
which  can  be  used,  experiments  which  have  been  tried  by  others, 
suggestions  for  advertising,  window  display,  and  better  book- 
keeping, —  aU  find  places  in  these  trade  journals,  but  in  addi- 
tion to  aid  of  this  sort  which  is  given  through  the  trade  publi- 
cations, there  is  a  great  deal  of  information  which  tells  the 
organizer  something  of  the  future  demand  for  the  type  of 
goods  which  he  handles. 

A  business  sometimes  makes  its  own  studies.  —  Business 
men  do  not,  of  course,  rely  entirely  on  the  agencies  which 
the  government  or  other  individuals  have  placed  at  their 
disposal.  They  make  their  own  studies  of  the  situation. 
Sometimes  they  use  their  salesmen  as  investigators  to  study 
the  probable  future  of  the  market.  It  has  been  said  that  a 
careful  salesman  not  only  sells  goods  but  looks  also  at  the  stock 


390  OUR  ECONOMIC   ORGANIZATION 

on  the  shelves,  estimates  its  value  and  size,  forms  an  opinion 
of  the  general  character  and  condition  of  the  business,  and  of 
the  buying  power  of  the  town.  All  this  information  is  carried 
back  to  the  "  home  office  "  of  the  manufacturer  or  wholesaler, 
and  on  the  basis  of  it  the  demand  for  goods  in  the  future  can 
be  estimated.  Sometimes  —  and  the  practice  is  growing  fairly 
rapidly  —  the  manager  sets  up  a  research  bureau  within  his 
business  to  study  and  rejwrt  upon  conditions  affecting  the 
business.  Examples  will  be  found  in  The  International  Cor- 
poration, The  Consolidated  Steel  Products  Company,  and  in 
many  banks. 

Science  lessens  risks.  —  An  account  of  the  diminution  of  risk 
through  the  increase  of  knowledge  would  be  quite  incomplete 
without  a  reference  to  the  work  of  our  educational  institutions. 
Take,  for  example,  our  schools  of  technology.  In  nearly  every 
state  in  the  Union  there  are  now  one  or  more  engineering 
schools.  These  schools,  which  train  men  in  science  and  in  the 
application  of  these  studies  to  practical  affairs,  do  much  to  aid 
in  lessening  ignorance  of  natural  laws,  and  thus  reduce  the 
losses  which  flow  from  that  ignorance.  For  modern  factories 
and  modern  stores  there  have  been  developed  "  sprinkler 
systems "  which  are  an  automatic  protection  against  fire. 
Shipwreck  takes  place  less  frequently  because  we  have  improved 
the  instruments  which  the  navigators  use  as  guides,  because 
careful  soundings  have  been  made,  and  lighthouses  have  been 
established.  Modern  ships  are  frequently  built  with  compart- 
ments, so  that  a  leak,  though  it  fills  part  of  the  ship  with  water, 
will  not  disable  the  vessel.  Improved  mechanical  devices  are 
also  used  to  guard  against  loss  in  railroad  transportation. 
Heavier  rails  and  scientifically  built  road-beds  make  spreading 
rails  and  track  washouts  less  common.  Air  brakes  give 
engineers  control  over  the  capital  which  is  in  their  charge  and 
"  interlocking  block  systems  "  have  greatly  reduced  the  number 
of  railroad  wrecks.  Factory  buildings  collapse  less  frequently 
than  formerly,  because  of  the  improved  methods  of  building. 
Fireproof  roofing  materials,  burglar  alarms,  and  safety  valves 


RISK-BEARING  BY  THE   ENTERPRISER  391 

on  steam  boilers  must  all  be  included  among  the  contrivances 
with  which  we  attempt  to  reduce  the  risks  and  wastes  of  capital 
goods.  For  all  of  these  society  owes  a  debt  to  the  study  of 
science  and  engineering. 

Agricultural  schools  and  experiment  stations  perform  a 
similar  function.  These  are  continually^  experimenting  as  to  the 
tj^pe  of  crops  which  can  best  be  raised  on  certain  soils.  They 
study  animal  diseases  and  devise  means  for  curing  and  pre- 
venting their  ravages.  Such  institutions  then  are  very  impor- 
tant in  the  reduction  of  risks  and  wastes  of  capital.  They 
lessen  the  losses  due  to  "natural  causes."  The  work  of  the 
weather  bureau  is  of  the  same  order. 

One  writer  summarized  the  need  for  agencies  which  will 
provide  information  in  the  following  words  : 

"The  business  man  must  of  necessity  have  a  wide  vision,  for  the 
cable,  the  telegraph,  the  railroad,  and  the  ocean  steamer  have  brought 
the  uttermost  parts  of  the  world  so  close  together,  that  the  state  of 
the  market  in  New  York  may  depend.upon  an  event  in  Africa,  a  famine 
In  India,  a  revolution  in  China,  a  short  crop  in  Argentina,  a  speech  in 
the  EngUsh  ParUament,  a  mm-der  trial  in  Los  Angeles,  an  editorial  in 
a  weekly  paper  in  Philadelphia,  or  an  election  m  Canada." 

Anj''  one  engaged  in  business,  therefore,  must  understand  how 
to  read  the  signs  of  the  times,  and  after  bringing  together  the 
various  facts  obtained  from  every  part  of  the  earth,  be  able  to 
form  a  fairly  accurate  judgment  as  to  the  course  of  the  markets. 
In  so  far  as  he  is  able  to  do  this,  he  is  able  to  reduce  the  risks 
of  business ;  in  so  far  as  he  fails,  he  is  dependent  upon  chance 
like  a  mere  gambler. 

The  modern  business  man  must  know  what  is  going  on  in 
the  world,  and  this  is  true  not  alone  of  events  in  commerce, 
though  that  is  of  prime  importance  to  him,  but  also  of  events 
in  politics,  events  in  science,  and  even  events  in  literature. 

We  try  to  reduce  risks  through  social  control.  —  Reduction 
of  risks  through  social  control  has  already  been  illustrated  in  the 
foregoing  discussion,  notably  in  the  cases  of  the  crop  reporting 
system,  the  work  of  the  weather  bureau,  the  consular  service, 


392  OUR  ECONOMIC   ORGANIZATION 

and  the  contribution  of  educational  institutions.  This  means 
of  reducing  risks  is  so  important,  however,  that  it  deserves 
particular  mention  and  further  illustrations.  A  great  mass  of 
the  regulative  activities  of  government  (see  p.  321)  are  designed 
to  give  certainty  to  business  relationships  and  are  therefore 
properly  listed  as  methods  of  risk  reduction  or  avoidance. 
Particularly  the  actions  of  the  state  and  federal  governments  in 
setting  up  machinery  for  the  conciliation  and  arbitration  of 
disputes  between  labor  and  capital  should  be  mentioned  since 
we  have  listed  these  disputes  as  an  important  phase  of  busi- 
ness risks  in  our  society. 

PROBLEMS 

1.  Give  a  list  of  natural  risks.  Does  it  appear  to  you  correct  to 
call  them  risks  due  to  ignorance  ? 

2.  What  causes  can  you  assign  for  changes  which  occur  in  con- 
sumers' wants?  Do  these  changes  mean  social  loss?  Do  you  think 
the  loss  sometimes  more  than  offset  by  gains  ? 

3.  The  production  of  shoes  begins  with  the  making  of  machines 
to  make  machines  to  make  shoe  machinery.  Is  this  statement  true 
or  does  production  begin  even  farther  back?  Why  does  production 
so  far  in  anticipation  of  demand  mean  risks  ? 

4.  Did  the  farmer  on  the  manor  take  the  risks  which  come  from 
production  in  advance  of  demand  ? 

5.  Are  risks  greater  in  a  changing  condition  of  industry?  Why 
or  why  not  ?     Are  risks  greater  in  a  wide  market  ? 

6.  Was  market  news  necessary  on  the  manor?  Was  it  necessary 
to  have  agencies  to  anticipate  demand  on  the  manor? 

7.  When  our  country  is  at  war  our  national  government  buys 
shoes,  clothes,  steel,  and  shells  in  great  quantities.  When  the  war 
ends,  the  government  ceases  to  be  a  large-scale  buyer  of  shoes,  clothes, 
steel,  and  shells.  Are  manufacturers  who  equip  their  factories  to  make 
these  goods  in  time  of  war  taking  a  risk?  Can  you  see  any  relation 
between  the  risks  assumed  by  the  manufacturers  and  the  large  profits 
which  they  ask  under  such  circumstances? 

8.  Suppose  that  the  aeroplane  should  be  so  improved  that  pas- 
sengers in  large  numbers  couki  make  rapid  and  safe  trips  from  one 


RISK-BEARING  BY  THE   ENTERPRISER  393 

city  to  another.  Would  the  present  number  of  passenger  cars  be 
useful?  To  what  cause  would  you  ascribe  the  junJking  of  passenger 
cars  which  would  follow  such  a  use  of  aeroplanes? 

9.  A  store-keeper  in  a  small  town  recently  made  this  complaint, 
"Formerly  I  had  a  good  business;  I  built  a  large  store.  Then  the 
mail  order  house  began  to  sell  goods  direct  to  my  customers.  Now 
all  this  capital  of  mine  is  idle  and  useless."  What  would  you  say 
was  the  cause  of  his  capital  becoming  useless? 

10.  If  the  mail  order  house  is  able  to  undersell  the  small  store  in  the 
local  town  does  it  seem  to  you  that  society  gains  by  such  a  new  organ- 
ization as  the  mail  order  house  ?  May  there  be  a  gain  through  forcing 
the  small  store  to  use  better  methods? 

1 1 .  When  new  organization  makes  old  capital  useless,  is  it  difficult  to 
decide  whether  the  loss  of  capital  is  greater  than  the  gain  through  the 
new  organization  ? 

12.  Has  there  ever  been  a  strike  in  your  toMoi  ?  Did  society  suffer 
a  loss  or  waste  of  capital  as  a  result?  Explain  how,  if  you  think 
it  did. 

13.  Suppose  you  were  the  proprietor  of  a  store  in  a  small  town. 
If  the  factories  in  that  town  closed  would  it  have  any  effect  on  your 
purchases  of  goods?  Would  such  closing  of  factories  affect  the  bank? 
Explain. 

14.  Explain  why  the  risks  taken  by  a  factory  are  very  large  as 
compared  with  those  of  a  man  who  has  httle  "overhead  expense." 
If  you  buy  a  share  in  a  railroad  that  is  being  constructed,  are  you  a 
risk  taker? 

15.  Is  the  boy  who  spends  time  and  money  attending  high  school 
and  college  taking  a  risk  that  these  expenditures  will  not  prove  profit- 
able ?  Is  the  boy  who  does  not  go  to  high  school  and  college  taking  a 
risk  that  his  work  will  be  less  profitable  than  going  to  school  ?  Explain. 
Which  of  the  two  boys  seems  to  you  to  take  the  greater  risk  ? 

16.  Could  a  banker  aid  in  the  formation  of  useless  capital  ?  Explain 
how. 

17.  Commercial  agencies  and  research  companies  are  institutions 
which  have  grown  up  to  fill  a  need.  Have  they  "grown  up"  or  have 
they  been  "cultivated"?  If  so,  then  why  and  by  whom?  Explain 
the  work  done  by  this  type  of  company. 


394  OUR   ECONOMIC   ORGANIZATION 

18.  Is  oiu"  society  really  more  speculative  than  that  of  the  middle 
ages  ?    If  so,  what  factors  have  made  it  so  ? 

19.  By  means  of  advertising  a  manufacturer  can  control  people's 
wants.  Any  method  which  can  be  used  to  control  wants  tends  to 
lessen  the  risks  of  capital.  Do  these  statements  seem  to  you  to  be 
true?     If  true,  is  this  a  sufficient  defense  for  advertising? 

20.  Suppose  that  you  wish  to  build  a  house.  Are  you  taking  risk 
if  you  buy  the  materials  from  time  to  time?  How  can  you  lessen 
this  risk  by  contract  ?  Do  you  think  the  dealer  or  contractor  with 
whom  you  make  the  contract  is  taking  as  much  risk  as  you  would  be 
if  you  purchased  them  yourself?  Can  you  afford  to  pay  a  profit  to 
a  contractor  to  reheve  you  of  these  risks? 

21.  A  certain  cotton  manufacturer  displays  great  ability  in  the 
production  of  cloth,  but  he  is  nevertheless  barely  able  to  keep  his 
head  above  water,  because  he  is  a  poor  judge  of  the  raw  cotton  market 
and  is  more  likely  than  not  to  buy  when  prices  are  too  high.  Show 
how  he  could  Uberate  himself  from  the  consequences  of  this  defect  of 
judgment. 

22.  Miller  Jones  always  covers  purchases  of  wheat  for  milhng  by 
corresponding  short  sales.  Miller  Brown  boasts  that  he  is  no  specu- 
lator, and  refrains  entirely  from  transactions  on  the  wheat  exchange. 
Whether  prices  rise  or  fall,  Jones  is  insured  his  miller's  profit,  and 
never  receives  more.  If  prices  rise.  Brown  makes  a  profit  over  and 
above  his  miller's  profit.  When  prices  fall,  not  only  may  his  miller's 
profit  be  wiped  out,  but  he  may  incur  additional  losses.  Wliich  one 
is  really  the  speculator? 

23.  During  the  Civil  War  certain  wool  manufacturers  made 
enormous  profits  because  of  the  rise  in  price  of  raw  materials  which 
they  had  on  hand.  After  the  war  there  were  cases  where  these  profits 
were  nearly  wiped  out  by  losses  consequent  upon  the  fall  in  prices  of 
raw  materials.     Explain.     Could  the  loss  have  been  avoided? 

24.  Speculators  are  often  regarded  as  mere  gamblers.  If  the  whole 
body  of  speculators  were  to  cease  buying  and  selling  grain,  and  limited 
themselves  to  betting  upon  the  course  of  prices,  would  the  work  of 
commerce  and  industry  be  carried  on  exactly  as  it  is  at  present? 

25.  "  The  board  of  trade  is  one  of  the  greatest  insurance  institutions 
in  existence."     Do  you  agree? 


RISK-BEARING  BY  THE   ENTERPRISER  395 

26.  "Speculative  contracts  do  not  reduce  risks;  they  simply  pass 
the  risks  along,  and  society  must  face  as  many  and  as  great  risks  as 
would  have  been  the  case  if  no  such  device  as  speculative  contracts 
had  risen."     Is  this  true? 

27.  Does  insurance  reduce  risks  or  does  it  transfer  risks  from  the 
individual  to  society?  Just  what  is  the  function  of  insurance  in 
modern  industrial  society? 

28.  How  can  it  be  said  that  an  agricultural  or  engineering  school  is 
a  device  which  lessens  risk? 

29.  Arbitration  boards  for  settling  labor  disputes,  safety  valves  on 
steam  engines,  city  firemen,  an  umbrella,  a  burglar  proof  safe,  fire- 
proof roofing,  hghtning  rods,  speculative  contracts,  and  overshoes  all 
have  a  similar  f imction.  Is  there  any  truth  in  this  statement  ?  If  so, 
what  function?     Could  you  add  others  to  the  list? 

30.  The  importance  of  agencies  to  give  market  news  varies  with  the 
width  of  the  market.  The  importance  of  market  news  agencies  varies 
with  the  time  element  of  the  market.     Explain  these  statements. 

31.  To  whom  are  government  crop  reports  of  aid  in  determining 
business  actions?  Why  could  not  a  farmer  get  this  information  as 
well  for  himself?  Who  pays  for  gathering  the  information  given  in 
government  reports  ?  Do  you  tliink  it  fair  that  a  doctor  who  is  a  tax 
payer  should  aid  in  paying  for  the  gathering  of  crop  reports  ? 

32.  Associations  of  business  men  such  as  a  manufacturer's  associa- 
tion of  a  state  or  locality  often  publish  trade  journals.  Why  should 
they  do  this?  Why  should  an  individual  publish  a  trade  journal? 
Can  you  tell  from  an  examination  of  a  trade  journal  how  the  pubUshers 
make  their  profits? 

33.  Suppose  that  you  contemplate  opening  a  grocery  store  in  a 
town  where  most  of  the  people  work  in  a  factory  which  manufactures 
steel.  List  all  agencies  which  you  might  use  in  deciding  whether  it 
would  be  advisable  to  open  the  store  at  all,  and  in  what  location  it 
would  be  advisable  to  open  it. 

34.  If  society  does  not  provide  good  agencies  for  gathering  market 
news,  there  is  great  chance  that  social  energy  will  be  wasted.     Wliy? 

35.  Illustrate  risk  being  reduced  (1)  by  increasing  our  knowledge 
of  the  future;  (2)  by  employing  safeguards;  (3)  by  insurance; 
(4)  by  speculative  contracts ;   (5)  by  social  control. 


396  OUR   ECONOMIC   ORGANIZATION 

36.  Draw  up  as  long  a  list  as  you  can  of  the  various  devices  and 
structures  which  have  been  developed  as  a  result  of  the  speculative 
character  of  industrial  society. 

37.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  pp.  470-473,  Selections 
178-200. 


STUDY  XXII 

INTERNAL   BUSINESS   ORGANIZATION   AND   EFFECTIVE 
UTILIZATION  OF  PRODUCTIVE  RESOURCES 

PURPOSES  OF  THIS  STUDY: 

1.  To  see  the  great  importance  to  society  of  good  apportionment  of  re- 

sources within  business  units. 

2.  To  study  some  of  the  principles  and  devices  used  by  the  manager  in 

making  effective  use  of  productive  resources. 

Apportionment  of  productive  resources  occurs  within  a 
business  unit.  —  The  last  four  studies  have  been  concerned 
with  the  problem  of  the  apportionment  of  our  productive 
resources  among  the  various  enterprises  of  modern  industrial 
society.  Study  XVIII  was  a  general  survey  of  this  apportion- 
ment, closing  with  a  discussion  of  the  part  played  b}^  the 
business  enterpriser.  Studies  XIX  and  XX  showed  the  part 
played  in  apportionment  by  our  pecuniary  organization. 
Study  XXI  continued  this  discussion  by  showing  the  diffi- 
culty and  complexity  of  the  task  of  the  business  man  in  his 
effort  to  estimate  the  requirements  of  the  society  round  about 
him.  Considerably,  though  not  exclusively,  Study  XXI 
dealt  with  the  work  of  the  risk-taker  in  estimating  the  require- 
ments of  "  the  market  "  and  was  therefore  mainly  a  discussion 
of  the  apportionment  of  productive  resources  among  the  various 
enterprises  of  the  community. 

We  shall  now  take  up  the  enterpriser's  work  with  particular 
reference  to  the  internal  management  of  his  business  unit. 
In  turning  to  this  topic,  we  assume  that  he  has  decided  that 
"  the  market  "  justifies  his  producing  a  certain  commodity,  — 
justifies  devoting  some  of  society's  resources  to  that  particular 
task.     The  problem  now  before  the  enterpriser  is  that  of  deter- 

397 


398  OUR   ECONOMIC   ORGANIZATION 

mining  the  appropriate  apportionment  of  productive  resources 
'Within  that  business  unit.  How  much  land  and  of  what  kinds? 
How  much  labor  and  of  what  kinds?  How  much  capital  and 
of  what  kinds?  How  organize  the  whole?  These  are  some 
of  the  questions  now  facing  him  (see  p.  318).  Society  is  in- 
terested in  his  answers.  If  they  are  "  correct  "  answers,  society 
may  gain  through  increased  production  of  want-satisfying 
goods.  If  his  answers  are  "  incorrect,"  society  loses  because 
of  the  ineffective  adjustment  of  productive  resources. 

When  individual  business  organizers  so  organize  their 
business  units  that  labor  or  land  or  capital  is  wasted,  it  means 
a  waste  of  social  resources.  If  a  manufacturing  plant  in  New 
Jersey  is  employing  twenty  men  more  than  it  needs  properly 
to  use  the  amount  of  machinery  which  it  has,  the  work  of  those 
twenty  men  is  being  wasted.  If  a  manufacturing  plant  in 
Chicago  has  too  large  an  amount  of  machinery  in  proportion 
to  the  number  of  workers,  a  waste  of  capital  results.  Clearly, 
what  all  of  us  wish  to  have  brought  about  is  such  a  condition 
in  every  business  that  there  will  be  just  the  "  right  "  amount 
of  capital  working  with  the  "  right  "  amount  of  land  and  the 
"  right  "  amount  of  labor.  In  this  way  we  will  secure  the 
greatest  amount  of  goods  with  the  least  effort  and,  therefore, 
at  the  lowest  cost.' 

Effective  adjustment  of  productive  resources  greatly  in- 
creases production.  —  The  saving  which  can  be  effected  by 
careful,  thoughtful  organization  is  well  illustrated  by  the 
experience  of  an  industrial  engineer  who,  some  years  ago,  had 
occasion  to  find  out  whether  improvements  could  be  made  in 
the  organization  of  the  men  and  implements  engaged  in  brick- 
laying. His  experiments  were  very  extended,  but  for  our  pur- 
poses we  need  consider  only  that  part  of  his  study  which  dealt 

'  The  teacher  will  use  his  discretion  concerning  the  amount  of  safeguarding  which  should 
here  be  brought  into  use  against  leaving  with  the  student  an  impression  that  this  is  "the 
best  of  all  possible  worlds"  and  that  all  business  gains  are  in  direct  proportion  to  service 
rendered  society.  The  text  will  proceed  on  the  assumption  that  young  beginning  students 
may  wisely  be  shown  first  the  appropriate  goals  of  business  activity,  assuming  sound  and 
effective  social  control  of  business  activity. 


INTERNAL   BUSINESS   ORGANIZATION  399 

with  the  probloms  of  building  a  plain  brick  wall  for  a  house. 
The  principles  which  he  worked  out  can  be  applied  to  other 
forms  of  bricklaying,  and,  indeed,  with  proper  allowances 
for  changed  conditions,  to  all  forms  of  industry. 

It  did  not  take  this  engineer  long  to  come  to  the  conclusion 
that  he  must  first  of  all  select  his  workers,  —  must  get  the 
"  right  "  men  for  the  task.  Some  men  had  ph3\sical  and  mental 
disabilities  absolutely  debarring  them  from  such  work.  Others 
had  disabilities  which  would  handicap  them  severely  unless 
corrected.  Still  others,  physically  and  mentally  able  to  do 
the  work,  lacked  training  and  experience  which  the  engineer 
felt  he  could  not  afford  to  give  them  unless  it  was  not  possible 
to  secure  workers  already  competent  to  do  the  work.  It  is 
evident  that  quite  serious  management  problems  confronted 
him  with  respect  to  getting  a  "  fit  and  fitted  "  labor  force. 

In  arranging  his  labor  force  the  engineer  did  not  stop  with 
his  selection  of  bricklayers.  The  wages  of  good  bricklayers 
are  high,  and  our  engineer  saw  that  in  the  usual  methods  of 
building  houses  these  high-priced  bricklayers  spent  a  great  deal 
of  time  in  sorting  out  from  a  disorderly  pile  of  bricks  the  ones 
appropriate  for  use  in  the  various  parts  of  the  wall.  Often, 
also,  the  bricks  were  delivered  to  the  bricklaj^er  in  such  a 
fashion  that  it  was  necessary  for  him  to  turn  or  "  flip  "  many  of 
them  in  his  hand  in  order  to  get  them  in  exactly  the  right 
position  to  apply  to  the  wall.  Neither  the  sorting  process  nor 
placing  the  brick  in  the  right  position  was  a  task  which  required 
great  skill.  Either  one  could  be  performed  by  a  low-priced 
laborer.  Our  engineer  made  provision  that  this  should  be 
done.  The  different  grades  of  work  could  now  be  performed 
by  workers  of  appropriate  skill. 

After  this  engineer  had  secured  as  bricklayers  thoroughly 
competent  men  and  had  provided  them  with  satisfactory 
unskilled  helpers,  he  studied  carefully  the  movements  made 
by  them.  He  analj^zed  so  thoroughly  the  movements  made 
in  laying  bricks  that  he  could  tell  what  motions  were  necessary 
and  what  ones  were  merely  waste  of  time  and  effort.     He  saw 


400  OUR  ECONOMIC  ORGANIZATION 

also  that  much  time  and  effort  were  wasted  because  the  tools  in 
common  use  in  bricklaying  were  not  properly  adapted  to  the 
operation. 

One  of  the  tools  commonly  used  in  laying  bricks  is  the  mortar 
board.  Upon  this  board  the  mortar  usually  lies  in  such  a  thin 
heap  that  the  worker  quickly  exhausts  the  supply  nearest  him 
and  then  finds  it  necessary  to  reach  a  long  distance,  and  some- 
times even  to  take  a  step  in  order  to  reach  the  mortar  on  the 
opposite  side  of  the  board.  The  mortar  board  seemed  to  the 
engineer  a  poor  tool,  and  he  accordingly  devised  a  mortar  box 
or  tub.  In  this  the  mortar  was  deep  and  when  the  tub  was 
placed  close  to  the  worker,  long  motions  and  steps  could  be 
avoided,  for  in  the  deep  box  or  tub  the  worker  could  be  sure 
to  fill  his  trowel  merely  by  dipping  in. 

The  elimination  of  unnecessary  motions  was  facilitated  by 
making  certain  improvements  in  the  scaffold,  which  we  may 
think  of  as  another  tool.  Prior  to  the  investigation  of  this 
engineer,  it  was  usual  to  have  a  scaffold  which  was  not  readily 
adjustable  with  respect  to  height.  When  the  wall  was  low 
in  relation  to  the  floor  of  the  scaffold,  the  bricklayer  had  to  do 
his  work  in  an  awkward  position.  When  the  wall  was  high, 
his  position  was  again  awkward.  These  awkward  positions 
seriously  affected  his  efficiency.  Then,  too,  on  the  scaffold 
would  be  a  sort  of  table  with  bricks  and  mortar  placed  upon  it. 
The  height  of  this  table  was  not  always  carefully  planned. 
In  many  cases  the  workman  had  to  take  a  step  or  two,  stoop 
over  to  pick  up  a  brick,  straighten  up,  and  then  step  back 
to  the  wall  to  lay  it,  thus  using  more  energy  in  moving  his  body 
than  in  moving  the  bricks. 

The  engineer  made  a  better  adjustment.  He  planned  what 
he  called  a  nonstooping  scaffold  which  might  also  be  called  a 
nonstepping  scaffold.  The  floor  of  the  scaffold  was  always  at 
the  most  convenient  height  in  relation  to  the  height  of  the  wall, 
and  the  tables  on  which  the  bricks  and  mortar  lay  were  a  definite 
distance  from  the  workman  and  from  the  wall,  and  always  at 
definite  heights.     The  result  was  a  very  considerable  increase 


INTERNAL  BUSINESS  ORGANIZATION  401 

in  the  number  of  bricks  which  could  be  laid  in  a  day  without 
at  all  increasing  the  strain  on  the  worker.  Indeed,  the  strain 
was  diminished. 

This  account  of  the  organization  of  the  factors  of  production 
engaged  in  the  making  of  a  brick  wall  illustrates  the  importance 
of  proper  organization.  The  whole  story  of  these  experiments 
in  bricklaying  would  show  that  the  industrial  engineer  brought 
about  a  remarkable  increase  in  the  productivity  of  the  men, 
materials,  and  tools  engaged  in  this  work. 

Many  other  careful  experiments  have  been  made  in  business 
plants  to  secure  proper  organization  of  land,  labor,  and  capital. 
One  man,  for  example,  found  by  directing  a  workman  how  prop- 
erly to  handle  bars  of  pig-iron,  four  times  as  much  work  could 
be  performed  in  a  day  with  less  fatigue  than  before.  Another 
experiment  proved  that  in  so  simple  a  task  as  shoveling  ashes 
a  vast  increase  in  productivity  of  work  could  be  brought  about 
by  a  scientific  study.  In  an  automobile  factory  it  was  found 
that  proper  organization  enabled  a  group  of  men,  without 
any  added  strain,  to  produce  50  fenders  in  a  day  of  eight  hours 
where  the  same  group  had  formerly  made  only  38  in  a  nine- 
hour  day.  Business  men  of  late  years  are  becoming  very  much 
awake  to  the  savings  that  can  be  secured  by  carefully  planned 
organization  within  their  business  units. 

Economists  approach  the  problem  through  the  law  of 
diminishing  returns.  —  That  losses  occur  when  workmen,  raw 
materials,  and  capital  are  not  properly  adjusted  to  one  another 
has  long  been  pointed  out  by  economists.  Their  favorite 
illustration  has  been  taken  from  farming.  A  farmer,  for 
example,  wishes  to  sow  a  field  with  oat  seed.  Let  us  say  that 
two  to  two  and  one  half  bushels  of  seed  to  the  acre  is  the 
amount  which  farmers  have  found  to  be  "  right."  Seed  is, 
of  course,  capital.  It  is  easy  to  see  that  too  small  a  quantity 
of  seed,  for  instance  half  a  bushel  to  the  acre,  might  be  in- 
efficient because  the  strength  of  the  land  would  not  be  properly 
utilized.  On  the  other  hand,  too  large  a  quantity  of  seed, 
possibly  five  or  six  bushels  to  the  acre,  might  be  inefficient 


402  OUR  ECONOMIC   ORGANIZATION 

because  there  would  not  be  sufficient  nourishment  for  all  the 
plants  which  would  spring  up. 

It  is  just  as  easy  to  see  that  too  much  labor  to  a  certain 
amount  of  land  might  be  quite  as  inefficient  as  too  much  seed 
would  be.  Let  us  say  that  one  man  is  able  with  modern 
machinery  to  cultivate  and  care  for  eighty  acres  of  corn. 
This  may  be  said  to  be  the  "  right  "  amount  of  labor  to  appor- 
tion to  eighty  acres  of  land  which  is  being  used  to  raise  corn. 
If  two  men  were  apportioned  to  the  work  of  caring  for  an  eighty- 
acre  cornfield,  they  might  be  able  to  keep  the  weeds  more 
thoroughly  removed  and  the  corn  better  cultivated,  and  thus 
produce  somewhat  more  corn  than  could  one  man.  But  it  is 
not  hard  to  see  that  two  men  could  not,  by  cultivating,  produce 
from  an  eighty-acre  field  twice  as  much  corn  as  one.  To  put 
three  men  to  work  in  the  same  field  would  only  diminish  still 
further  the  returns  in  proportion  to  the  amount  of  labor 
expended.  The  fact  that  the  output  under  some  circumstances 
becomes  less  or  diminished  in  -proportion  to  the  units  of  one 
factor  of  production  which  are  added,  is  called  the  law  of 
diminishing  returns. 

For  purposes  of  our  present  study  we  need  to  notice  two 
aspects  or  phases  of  this  law  of  diminishing  returns.  The  first 
of  these  may  be  called  the  technological  phase.  It  is  this  phase 
which  has  just  been  illustrated  in  the  account  of  the  workers 
in  the  cornfield.  Measured  in  terms  of  physical  units  of  labor 
supplied  and  in  terms  of  physical  units  of  corn  produced  there 
was  a  diminished  (per  unit  of  labor  applied)  return.  But 
even  so  it  might  be  wise  for  the  farmer  to  operate  his  cornfield 
in  this  way.  In  other  words,  there  is  a  financial  phase  of  the 
law  of  diminishing  returns  and  it  is  quite  possible  that  the  price 
secured  from  the  added  bushels  of  corn  more  than  repaid  the 
farmer  for  costs  of  the  added  labor  outlay. 

If  this  farm  illustration  be  applied  more  broadly,  we  can  say 
that  the  manager  must  watch  carefully  the  technological 
aspects  involved  in  com})ining  his  productive  factors  and  must 
watch  their  action  in  financial  terms  in  order  to  arrive  at  sound 


INTERNAL  BUSINESS  ORGANIZATION  403 

conclusions  concerning  how  to  operate  his  business  unit  profit- 
ably. 

There  are  principles  of  management  which  should  be  used.  — 
It  is  clear  enough  that  it  requires  thought  to  manage  a  modern 
business  unit  effectively,  no  matter  whether  it  is  a  farm,  a 
department  store,  a  machine  shop,  a  shoe  factory,  or  some- 
thing else.  As  time  has  gone  on  certain  general  principles  of 
management,  or  certain  general  statements  concerning  how  to 
go  about  the  task  of  management  have  been  developed.  It 
will  be  worth  while  for  us  to  notice  three  of  these. ^ 

1.  Systematic  use  should  be  made  of  experience. 

2.  Personal  effectiveness  should  be  promoted. 

3.  Effort  should  be  economically  regulated. 

Systematic  use  should  be  made  of  experience.  —  That  we 
should  profit  by  the  teachings  of  experience  is  obvious.  Both 
the  mistakes  and  the  successes  of  the  past  ought  to  be  drawn 
upon  to  set  standards  for  present  and  future  action,  and  the 
keen  manager  draws  upon  them.  For  example,  one  sales 
manager  has  kept  for  fifteen  years  detailed  records  of  how 
much  each  of  his  salesmen  has  been  able  to  sell  of  each  line  of 
his  goods  in  each  territory  into  which  the  manager  has  divided 
the  country.  These  records  take  into  account  varying  condi- 
tions of  seasons,  advertising,  etc.  The  sales  manager  has 
drawn  from  these  records  and  from  some  experiments  he  has 
carried  on  what  he  calls  a  "  set  of  standards."  From  these 
standards  he  estimates  in  advance  the  probable  sales  for  the 
coming  year  and  gives  each  of  his  salesmen  a  "  stint  "  or 
"  quota  "  or  "  bogey."  He  has  also  developed  other  "  stand- 
ards "  of  how  to  make  sales  and  these  have  been  passed  on  to  his 
men  for  use. 

The  work  of  this  sales  manager  serves  well  to  indicate  what 
must  be  done  to  make  systematic- use  of  experience.  First  of 
all  there  must  be  knowledge  of  what  has  happened  and  fre- 
quently this  means  that  records  must  be  kept.     Second,  this 

>  This  outline  of  the  work  of  management  is  adapted  from  A.  H.  Church  and  L.  P.  Al- 
ford,  "The  Principles  of  Management,"  in  American  Machinisl,  XXXVI,  pp.  857-861. 


404  OUR  ECONOMIC   ORGANIZATION 

knowledge  must  not  be  kept  as  a  mass  of  scattered  details  but 
must  be  reduced  to  standards  of  performance.  Third,  if  this 
knowledge  does  not  cover  the  whole  field,  the  gaps  must 
be  filled  by  experimentation.  Fourth,  present  and  future 
practice  must  be  measured  against  these  standards.  Fifth, 
continuous  effort  must  be  expended  to  improve  the  standards, 
and  sixth,  these  standards  must  be  passed  on  to  become  the 
ordinary  practice  of  the  concern. 

Of  course,  the  wise  manager  does  not  confine  himself  to  the 
experience  of  his  own  firm.  He  ranges  far  and  wide  in  search 
of  facts.  He  may  even  employ  outside  research  agencies. 
Furthermore  the  word  "  experience  "  as  here  used  is  very 
broad.  It  includes  securing  from  books  or  from  other  sources 
any  facts  bearing  upon  the  successful  conduct  of  his  business, 
for  his  "  standards  "  must  always  be  applied  in  the  light  of 
conditions  as  they  actually  exist. 

Personal  effectiveness  should  be  promoted.  —  The  modern 
risk-taker  does  not  merely  manage  things.  He  manages 
persons  who  are  working  with  things.  It  is  accordingly  wise 
for  the  manager  to  promote  in  any  reasonable  way  the  efficiency 
of  the  persons  concerned. 

Now  this  is  a  very  large  story.  It  certainly  includes  having 
good  physical  conditions  both  among  the  workers  and  among 
the  things  with  which  they  work.  We  saw  how  important  it 
was  to  have  good  physical  tools,  and  those  well  adjusted,  in 
the  account  of  the  engineer  who  studied  the  laying  of  bricks. 
That  same  account  showed  that  it  was  important  to  get  the 
"  right  "  person,  physically,  to  do  the  work.  It  is,  however, 
merely  a  beginning  to  get  the  physically  "  right  "  person  who 
starts  in  good  physical  health.  "Shop  conditions  must  be 
such  that  good  health  can  be  maintained.  This  point  is 
beginning  to  be  understood,  and  modern  shops  avoid  the  dirt, 
darkness,  and  obscurity,  and  extremes  of  cold  and  heat  that  a 
generation  ago  were  accepted  as  good  business.  We  have 
progressed  so  far  as  to  be  aware  that,  on  the  contrary,  they  are 
very  bad  business.     Closely  allied  is  the  question  of  affording 


INTERNAL  BUSINESS   ORGANIZATION  405 

facilities  for  personal  cleanliness,  dining  halls  for  the  midday 
meal,  and  other  auxiliaries  to  physical  needs  of  shop  existence. 
The  most  widespread  application  to-day  is  in  the  safeguarding 
of  machines  and  operations."  ^ 

Personal  effectiveness  is  not  concerned  merely  with  physical 
matters.  Account  must  also  be  taken  of  what  the  psychologist 
is  likely  to  call  "  the  will  to  do."  Probably  no  one  to-day 
knows  exactly  what  this  means,  but  all  of  us  know  some  of  the 
things  it  means.  It  means  that  the  best  results  are  obtained 
when  the  worker  approaches  his  work  in  a  frame  of  mind  which 
calls  forth  his  best  efforts.  Sometimes  this  frame  of  mind  is 
the  result  of  good  leadership.  All  of  us  do  better  when  we  have 
confidence  in  our  leaders.  Sometimes  it  is  the  result  of  the 
worker's  pride  and  interest  in  the  work  which  is  being  done. 
Sometimes  it  is  the  result  of  a  system  of  wage  payment  which 
gives  rewards  closely  related  to  the  amount  and  quahty  of 
performance.  Sometimes  it  is  a  combination  of  these  and 
other  factors.  Always  it  means  that  a  good  "  incentive  "  has 
been  found  to  do  good  work,  and  managers  are  eager  to  find 
these  good  incentives.  The  best  managers  realize  that  these 
incentives  should  not  be  used  in  such  a  way  as  to  lead  to  over- 
work. If  they  are  so  used,  overfatigue  and  poor  health  may 
result.  This  means  poor  physical  conditions  and  these  are  to  be 
avoided. 

Effort  should  be  economically  regulated.  —  Good  manage- 
ment means  much  more  than  having  experience  accumulated ; 
having  good  equipment ;  and  having  able  workers  filled  with 
the  "  will  to  do."  All  these  factors  might  be  present  in  a 
business  but  unless  they  were  combined  effectively  (the 
business  man  would  be  likely  to  say  "  controlled  "),  production 
would  be  below  what  it  ought  to  be.  Effort  must  be  economi- 
cally regulated. 

This  means  first  of  all  that  effort  must  be  divided,  —  so 
that  specialization  may  occur.  We  have  already  studied  the 
value  of  specialization  in  our  production  processes  (see  Studies 

'  Op.  cil. 


406  OUR   ECONOMIC   ORGANIZATION 

IX-XII)  and  discussion  of  its  contribution  may  accordingly  be 
omitted  here. 

Economic  regulation  involves  coordination  of  specialists.  — 
But  when  division  of  effort,  or  specialization,  occurs  steps  must 
also  be  taken  to  knit  these  various  processes  into  one  harmonious 
whole.     In  other  words,  specialized  effort  must  be  coordinated 


Courtesy  International  Harvester  Co.  of  America 
Setting  up  Mowers  in  McCormick  Reaper  Works  in  1885 

Little  was  known  about  progressive  machine  assembly  in  1885.     Compare 
this  with  the  way  they  do  it  to-day  as  shown  on  page  407. 

or  controlled,  and  just  here  is  one  of  the  hard  tasks  of  the 
manager  (see  p.  198). 

In  the  days  of  the  craft  gilds,  the  master  craftsman  knew 
and  conducted  personally  every  phase  of  business  activity 
within  his  small  shop.  It  was  not  necessary  to  turn  over  to 
other  people  part  of  the  power  of  directing.  As  businesses 
have  grown  larger,  however,  it  has  become  increasingly  neces- 
sary for  the  manager  to  turn  some  matters  over  to  subordinates 
for  execution,  reserving,  of  course,  general  supervision  and 
control.     Naturally,  it  is  wise  to  do  this  in  such  a  way  as  to 


INTERNAL  BUSINESS   ORGANIZATION 


407 


408  OUR  ECONOMIC   ORGANIZATION 

take  advantage  of  the  principle  of  specialization,  one  man,  for 
example,  taking  care  of  purchases,  another  of  finance,  and  still 
others  caring  for  other  functions.  The  accompanying  chart 
shows  how  the  various  functions  might  be  parceled  out  in  a 
manufacturing  business.  The  general  manager  supervises  the 
work  of  his  specialized  subordinates  after  having  determined, 
probably  in  conference  with  them,  the  policies  which  they  are 
to  carry  out.  It  need  hardly  be  said  that  they  all  make  "  sys- 
tematic use  of  experience." 

General 
Manager 


Financial       Purchasing  Sales  Production       Personnel         Legal 

Manager         Manager         Manager         Manager         Manager       Adviser 


Credit         Aceountingi       Salesman       Advertising 
Man         Department  Manager 

Possible  Departments  of  a  Manufacturing  Business 

This  diagram  reflects  not  only  the  fact  that  specialization  has 
taken  place,  that  effort  has  been  divided  —  but  also  the  further 
fact  that  it  has  been  coordinated,  for  the  lines  in  the  chart 
represent  "  lines  of  authority."  This  can  be  more  clearly 
seen  if  we  elaborate  the  chart  by  sketching  the  organization 
under  one  of  the  main  managers,  let  us  say  the  one  under  the 
production  manager.  (The  production  manager  in  a  manu- 
facturing establishment  may  be  thought  of  as  the  man  who  is 
in  general  charge  of  the  manufacturing  processes.)  A  very 
simple  production  organization  might  be  charted  as  shown  on 
the  facing  page. 

Such  a  chart  is  intended  to  indicate  that  definite  relation- 
ships have  been  set  up  among  the  people  concerned.  When  the 
general  manager  is  confronted  with  a  production  problem  the 
solution  is  worked  out  through  the  production  manager,  who, 
after  consulting  the  plant  engineer,  assigns  certain  tasks  to  his 
various   shop    superintendents.     The   superintendents    charge 


INTERNAL  BUSINESS   ORGANIZATION 


409 


the  several  foremen  with  certain  duties.  Each  foreman  is 
responsible  to  his  superintendent  but  takes  no  orders  from  the 
other  foremen.  The  foremen  in  turn  each  direct  the  work  of  a 
number  of  workmen.  The  workmen  are  all  on  the  same  level 
so  far  as  authority  is  concerned. 

Production  Manager 


Plant 
Engineer 
(Adviser  to  Manager) 


Shop 
Superintendent 


_J_ 


Shop 
Superintendent 


Foreman  \ 


Foreman 


Foreman 


Foreman 


iUi 


a  a  D  D 


D 


D    n    D         D    D    D 


D 


Workmen  Workmen  Workmen  Workmen 

Possible  Departments  under  a  Production  Manager 

The  foregoing  illustrates  only  one  of  several  different  methods 
of  drawing  up  an  organization  so  as  to  make  sure  that  efforts 
will  be  coordinated.  These  various  methods  may  be  regarded 
as  devices  which  have  been  developed  to  aid  the  manager  in 
his  tasks. 

Accounting  a  great  aid  in  economic  regulation.  —  Another 
device,  and  one  which  is  used  both  in  regulating  effort  and  in 
accumulating  experience,  is  the  keeping  of  records,  —  mainly 
accounting  records.  Every  business  man  is  continually  trying 
so  to  plan  his  work  that  he  can  organize  better  in  the  future 
than  he  has  done  in  the  past.  Every  business  man  tries  to 
make  use  of  his  mistakes  and  his  good  judgment  in  the  past  to 
work  out  an  organization  policy  for  the  future.  To  remember 
all  the  details  of  all  of  the  activities  that  transpire  every  day 


410 


OUR  ECONOMIC  ORGANIZATION 


in  his  business  would  be  impossible.  He  relies,  therefore,  upon 
many  written  records.  For  example,  he  keeps  careful  records 
of  his  raw  material  so  that  he  will  not  upon  the  one  hand  waste 
productive  resources  by  having  an  unnecessary  amount  of 
raw  material  on  hand,  and  will  not,  upon  the  other  hand,  have 
idle  machines  because  he  suddenly  "  gets  out  of  raw  material." 
A  record  sheet  which  serves  such  a  purpose  is  illustrated  below. 


Name  and  specification 

Usage  past                       Maximum  to  Minimum  to 

6  months be  on  hand be  on  hand .  . 


Date 


Purchased 


Quantity     O^^^^ 


Received 


QuanS     O^d^"- 


Issued 


Quantity     Order 


Balance 

Actu- 
ally ON 
Hand 


Remarks 


Raw  Materials  Stock  Record 


It  will  be  seen  by  a  glance  at  this  record  card  that  there  are 
spaces  in  which  the  quantity  of  material  purchased  can  be 
recorded,  other  spaces  in  which  the  amount  received  and  the 
amount  issued  for  use  in  the  factory  can  be  noted,  and  similar 
spaces  in  which  the  balance  of  material  on  hand  can  be  indi- 
cated so  that  it  can  be  observed  at  any  time  and  plans  made 
accordingly. 

Records  have  also  been  devised  which  enable  the  business 
manager  to  know  a  great  deal  about  the  kind  and  quantity  of 
work  which  is  being  done  by  his  men.  In  many  shops  and 
manufacturing  plants  the  workmen  or  foremen  are  required 
to  fill  out  "  time  tickets  "  somewhat  like  the  one  below  which 


INTERNAL  BUSINESS   ORGANIZATION  411 

give  a  record  of  the  hours  of  work  of  the  men  and  the  rate  of 
payment  which  they  are  receiving. 


Foundry 

-May  1,.. 

Workman's  Number.. .J5^.—             Name.. John  j 

Contract  No £50-.                                Time..^..Hrs. 

Operations                    Pouring              

....1918 
Regali 

.0.. Quarters 

Time 
3 

Chipping... 

.5..... 

6 

For  Cost  Clerk  only 
Rsite..80..    Value.. ...S^.^a... 

.Peterson... 

....Foreman 

From  these  "  time  tickets  "  of  each  job  of  work  which  the 
workmen  perform,  the  organizer  is  able  to  compute  the  total 
amount  of  work  which  a  man  does  in  a  week  or  a  month,  and 
he  can  also  compute  the  amount  of  labor  expense  to  which  he 
is  put  in  manufacturing  any  article  which  goes  through  his 
plant.  There  are,  of  course,  many  other  records  which  are 
used  by  the  business  organizer  in  keeping  track  of  each  worker 
and  the  grade  and  quantity  of  his  labor.  The  "  time  ticket," 
however,  gives  us  one  illustration  of  how  such  accounts  are 
kept. 

Besides  such  records  as  have  been  illustrated,  the  business 
organizer  makes  use  of  other  accounts.  He  keeps  careful 
accounts  of  all  costs  of  goods  made  in  his  business  and  of  the 
costs  of  selling  them.  Accounts  are  kept  which  show  how 
rapidly  the  machines  in  manufacturing  plants  are  wearing 
out  and  how  much  money  must  be  set  aside  as  a  reserve  fund 
to  purchase  new  machinery  when  the  old  is  no  longer  service- 
able. For  all  these  purposes  and  for  others  as  well,  accounting 
records  have  been  carefully  worked  out.     They  are  of  the 


412  OUR  ECONOMIC   ORGANIZATION 

greatest  aid  to  a  business  man  who  is  trying  to  understand  as 
thoroughly  as  possible  what  is  happening  in  his  factory  or 
store,  so  that  he  may  guide  his  business  policy  intelligently. 
They  help  him  form  a  judgment  whether  he  is  combining  land, 
labor,  and  capital  in  the  "  right  "  proportions. 

If  the  records  of  a  shoe  manufacturer,  measured  against 
"standards  "  set  by  experience  or  by  investigation,  show  him 
that  he  has  too  many  laborers  for  the  amount  of  machinery 
in  his  factory,  he  may  discharge  some  of  them  and  thus  release 
social  energy  for  work  in  some  other  line.  If  his  records  show 
him  that  he  has  too  small  an  amount  of  machinery,  he  may 
purchase  more  and  thus  draw  social  energy  to  the  making  of 
shoes.  The  same  principle  holds  true  in  every  other  factory, 
store,  farm,  and  railroad  where  accounts  are  kept.  It  is  largely 
by  means  of  accounts  that  business  men  determine  the  amount 
of  social  energy  of  any  kind  that  they  want.  Accounting  is 
thus  a  device  of  vital  importance  to  society  in  carrying  out  the 
function  of  apportioning  social  resources. 

Scientific  management  one  approach  to  the  foregoing  prin- 
ciples. —  In  recent  years  much  attention  has  been  given  to 
methods  of  improving  management.  "  Efficiency "  and 
"  scientific  management  "  are  much  talked  of  and  various 
"  systems "  of  management  have  been  proposed.  A  new 
profession,  that  of  the  industrial  engineer,  has  come  into  being 
with  the  aim  of  giving  expert  advice  on  management  problems. 
We  do  not  need  to  go  into  the  details  of  this  movement.  By 
the  development  and  use  of  many  devices  it  emphasizes  the 
systematic  use  of  experience,  the  development  of  personal 
effectiveness,  and  the  economic  regulation  of  effort. 

The  position  of  the  manager  summarized.  —  Partly  by  way 
of  a  review  of  what  has  been  said  in  this  chapter  and  partly 
to  connect  what  has  here  been  said  with  the  content  of  other 
chapters,  let  us  set  down  a  series  of  statements  concerning  the 
work  of  the  risk-taker  in  conducting  the  affairs  of  his  business 
unit. 

1.   Society  permits  the  risk-taker  to  conduct  business  units 


INTERNAL  BUSINESS  ORGANIZATION  413 

because  it  is  the  way  which  has  been  developed  for  securing 
"  right  "  apportionment  of  our  productive  resources  within 
the  business  unit.  Most  people  appear  to  believe  that  a 
coDQpetent  manager  will  do  this  work  well  and  will  therefore 
succeed  (make  gains)  in  this  competitive  society  of  ours. 
The  incompetent  manager,  on  the  other  hand,  will  be  eliminated 
through  business  failure.  As  time  goes  on,  therefore, —  the 
theory  runs  —  competent  men  will  be  in  charge  of  the  work  and 
society  will  gain  in  that  it  will  secure  a  large  output  of  want- 
gratifying  goods.  We  have  already  discussed  some  of  the 
merits  and  some  of  the  shortcomings  of  this  theory  (see  p.  329) 
and  that  discussion  need  not  be  repeated  here. 

2.  In  conducting  a  business  unit  the  manager  is  confronted 
by  many  problems.  One  of  the  most  serious  is  the  technological 
problem  —  that  of  an  appropriate  physical  combination  of  the 
factors  of  production.  We  have  seen  in  other  connections  that 
ours  is  a  technological  society  (see  p.  221).  In  modern  manu- 
facturing business  the  manager  is  almost  certain  to  have 
occasion  to  make  use  of  the  principles  of  chemistry,  physics, 
geology,  psychology,  and  ph3^siology.  If  he  cannot  do  so  him- 
self, he  must  hire  experts  who  can.  In  some  cases  advanced 
graduate  work  in  our  great  universities  does  not  give  training 
sufficient  to  cope  with  the  technological  problems  which  arise. 

3.  Another  serious  problem  is  the  price  problem  —  that  of  an 
appropriate  value  or  price  combination  of  the  factors  of  pro- 
duction. The  manager  does  not  simply  take  any  land,  labor, 
and  capital  that  happens  to  be  convenient  and  combine  them. 
In  every  case  price  enters.  He  must  ask  himself  such  ques- 
tions as  these :  "  Will  this  grade  of  labor  for  which  I  must  pay 
$8  a  day  be  better  for  me  than  another  grade  for  which  I 
must  pay  $5?  "  Shall  I  use  more  labor  at  $8  a  day  to 
do  a  certain  piece  of  work  or  buy  labor-saving  machines  at 
$1000  a  machine?"  "Shall  I  use  a  $1000  machine  or  a 
$5000  machine?  "  After  he  has  solved  such  problems  he  faces 
the  fact  that  his  product  is  sold  "  at  a  price."  Unless  he  has 
monopoly  power,  he  will  be  able  to  control  neither  the  prices  of 


414  OUR   ECONOMIC   ORGANIZATION 

his  producers'  goods  nor  those  of  his  product.     "  The  market  " 
sets  the  prices. 

4.  Furthermore,  the  manager  deals  with  his  problems  under 
the  ruhngs  of  social  control.  He  cannot  always  do  the  thing 
which  would  pay.  Suppose  he  and  his  cost  accountant  agree 
that  it  would  be  profitable  to  use  child  labor.  He  will  not  use 
it,  if  the  law  of  the  state  forbids.  Or  suppose  that  his  cost 
accountant  demonstrates  that  it  would  be  profitable  to  omit 
certain  safety  devices.  It  is  clear  that  the  law  of  the  state  may 
be  more  persuasive  than  the  calculation  of  the  cost  accountant. 
Or  suppose  his  sales  manager  demonstrates  that  a  certain  form 
of  advertising  would  be  profitable.  If  this  form  of  advertising 
happens  to  run  counter  to  the  code  of  ethics  of  the  Associated 
Advertising  Clubs  of  America,  our  business  manager  may  not 
think  it  wise  to  follow  the  gleam  of  profits.  Then,  too,  as  we 
have  seen  (see  p.  323)  the  institutional  life  round  about  him,  — 
such  as  the  banking  system,  or  the  marketing  methods,  —  largely 
fixes  the  ways  in  which  he  may  carry  on  his  work. 

5.  We  must  not  forget  that  the  manager  is  in  a  rapidly 
changing  society  and  that  these  changes  affect  all  problems 
he  must  meet.  There  are  changes  in  technique.  Science  is 
always  finding  new  ways  of  doing  things.  The  method  of 
production  or  of  marketing  may  be  completely  changed  in  a 
few  years;  notice,  for  example,  the  rapidly  increasing  use  of 
electric  power  and  of  the  mail  order  house.  There  are  changes 
in  prices,  a  matter  discussed  in  Study  XIX.  There  are  changes 
in  laws,  in  pubhc  opinion,  and  in  the  social  environment  in 
general.  The  manager  has  little  part  in  causing  these  changes. 
Nevertheless,  the  slightest  misjudgment  of  them  may  result 
in  business  failure.  Truly  the  modern  manager  needs  to  know 
"  how  this  world  is  put  together  and  what  makes  it  act  the 
way  it  does." 

6.  Much  attention  is  being  given  these  days  to  the  develop- 
ment of  principles  and  devices  which  will  make  the  manager 
better  able  to  copo  with  his  many  and  vaii(>d  ))roblems.  It  is 
the  need  of  such  principles  and  devices  that  has  given  rise  to  our 


INTERNAL  BUSINESS   ORGANIZATION  415 

emphasis  upon  such  matters  as  cost  accounting,  business 
statistics,  scientific  management,  industrial  engineering,  and 
education  for  business  management. 

7.  We  must  not  deceive  ourselves  concerning  the  importance 
of  good  management.  It  is  important  not  only  for  the  business 
unit  concerned,  but  also  for  society.  It  is  as  important  in  an 
enterprise  conducted  by  the  government  as  it  is  in  an  enter- 
prise conducted  by  private  individuals.  It  would  be  important 
in  any  organization  of  society  we  can  imagine,  for  always  it  would 
be  important  to  have  productive  resources  wisely  utilized. 

PROBLEMS 

1.  Explain  why  society  is  interested  in  having  "a  correct  appor- 
tionment of  productive  resources  among  the  various  enterprises  of  the 
community."  Why  is  society  interested  in  having  a  correct  appor- 
tionment of  productive  resources  within  the  walls  of  John  Smith's 
business?    Why  is  John  Smith  interested? 

2.  Can  you  give  examples  of  men  or  women  who  are  better 
adapted  to  one  kind  of  work  than  to  another?  Suppose  that  a  man's 
feet  are  crippled,  does  this  handicap  him  for  farm  labor?  Does  it 
handicap  him  for  writing  books  ?  Can  you  tell  whether  he  will  better 
write  books  dealing  with  mathematics  or  geography? 

3.  Show  how  the  industrial  engineer  who  was  studjdng  how  to 
lay  bricks  had  to  watcli  lest  the  increased  cost  of  tools  offset  the  gains 
coming  from  the  ability  of  the  worker  to  lay  more  bricks. 

4.  Study  the  account  of  the  work  of  this  industrial  engineer  with 
the  puipose  of  finding  out  what  is  meant  by  time  and  motion  study. 

5.  How  many  square  feet  of  wall  should  a  man  paint  in  a  day? 
Explain  how  "time  and  motion  study"  might  help  to  answer  this 
problem. 

6.  Suppose  that  you  are  employing  ten  men  to  build  a  brick  build- 
ing. Each  man  is  able  to  lay  a  certain  number  of  bricks  an  hour. 
You  have  determined  in  advance  exactly  how  fast  hod-carriers  will 
need  to  work  to  supply  the  masons  with  bricks.  Suppose  one  of  these 
hod-carriers  does  not  perform  his  standardized  task,  whose  time  is 
lost? 


416  OUR   ECONOMIC   ORGANIZATION 

7.  In  a  certain  factory  twenty  men  work  on  one  part  of  an  auto- 
mobile. As  soon  as  this  part  is  finished  it  is  attached  to  a  tsecond  part 
upon  which  fifteen  men  are  employed.  If  the  second  part  is  not 
ready  as  soon  as  the  first,  the  twenty  men  have  nothing  to  do  until 
the  second  part  arrives.  Explain  how  "  time  and  motion  study  "  and 
standardized  tasks  might  save  money  in  factories  where  such  "as- 
sembly "  of  parts  must  be  made. 

8.  Is  the  capital  which  you  use  well  adjusted  to  your  use?  Is 
your  desk  too  high  or  too  low?  Is  the  light  poor,  or  does  it  come 
from  an  inconvenient  direction? 

9.  Make  a  visit  to  the  kitchen  of  your  home  and  study  its  arrange- 
ments.    Can  you  suggest  improvement  in  its  organization? 

10.  See  if  you  can  discover  an  acti\'ity  in  your  home,  in  your 
father's  place  of  work,  or  in  your  school  where  a  great  deal  of  effort 
is  spent  needlessly. 

1 1 .  Explain  what  advantages  were  gained  by  the  proper  adjustment 
of  capital  and  labor  in  bricklaying. 

12.  A  manufacturer  of  barrels  produces  one  hundred  a  day  with  a 
certain  number  of  men  and  a  certain  number  of  machines.  If  he 
doubles  the  nmnber  of  men,  are  you  sure  he  can  produce  two  hundred  ? 
If  he  keeps  the  number  of  men  constant  and  doubles  the  number  of 
tools,  will  the  returns  or  output  increase  in  proportion  to  the  increase 
in  implements?     Will  it  remain  unchanged? 

13.  What  is  meant  by  the  "technological  law  of  diminishing 
return"?  Show  how  it  may  be  profitable  to  conduct  business  matters 
even  though  the  technological  law  of  diminishing  return  is  operating. 

14.  The  fii'st  general  principle  of  business  management  cited  in  the 
lesson  was  "systematic  use  should  be  made  of  experience."  Does 
this  apply  to  other  than  business  matters?     Give  examples. 

15.  A  business  manager  has  a  chance  to  buy  his  supply  of  coal  at 
a  bargain  for  the  ensuing  year.  Can  you  show  how  he  can  determine 
in  advance  how  much  he  will  need  ? 

16.  Why  does  a  business  manager  care  to  keep  a  record  of  the  cost 
of  production  of  his  goods  ? 

17.  Make  a  list  of  as  many  records  as  you  can  that  it  would  seem 
desirable  for  a  manufacturer  to  keep.  Show  one  use  which  he  might 
make  of  each  of  these. 


INTERNAL  BUSINESS   ORGANIZATION  417 

18.  "Accounting  is  an  instrument  of  control  in  the  hands  of  the 
business  executive.  Through  it  he  helps  work  out  the  proportioning 
of  the  various  productive  factors  in  his  business."  What  does  this 
mean? 

19.  Write  out  your  own  statement  of  the  value  of  recording  expe- 
rience not  as  a  mass  of  details  but  as  a  set  of  standards. 

20.  Do  you  understand  that  "experience,"  as  that  word  is  used  in 
this  lesson,  may  be  secured  from  laboratory  experimentation  ?  From 
reading  in  books  about  what  other  business  managers  do  ? 

21.  The  second  general  principle  of  business  management  cited  in 
the  lesson  was  "personal  effectiveness  should  be  promoted."  Does 
this  apply  to  other  than  business  matters?     Give  examples. 

22.  Explain  in  your  own  words  the  importance  of  (a)  good  physical 
conditions,  (6)  good  training,  and  (c)  good  "will  to  do"  in  the  promo- 
tion of  personal  effectiveness. 

23.  Some  persons  think  that  the  promotion  of  personal  effectiveness 
is  the  most  important  matter  in  all  business  management.  What  can 
you  say  in  support  of  that  position  ? 

24.  The  thu-d  general  principle  of  business  management  cited  in  the 
lesson  was  "effort  should  be  economically  regulated."  Mention  the 
various  methods  and  devices  which  may  wisely  be  used  in  this  process. 

25.  Review  the  study  of  specialization  in  business  units,  and  give 
disadvantages  that  arise  from  division  of  labor.  From  your  review 
of  the  same  lesson,  determine  whether  advantages  arise  from  specializa- 
tion of  capital  and  land  as  well  as  specialization  of  labor. 

26.  The  following  are  some  of  the  advantages  of  the  division  of 
labor: 

(a)  Adjustment  of  workers  to  tasks. 

(6)  Shortening  of  time  involved  in  learning  a  task. 

(c)  Less  waste  of  material  in  learning  tasks. 

(d)  Increased  dexterity  or  skill. 

(e)  Economy  of  tools. 

Show  why  each  of  these  advantages  is  present  in  division  of  labor. 

27.  The  whole  scheme  of  scientific  standardization  of  work  breaks 
down  and  becomes  useless  if  the  tasks  assigned  are  too  difficult.  Explain 
why  this  is  true. 


418  OUR  ECONOMIC   ORGANIZATION 

28.  Scientific  standardization  of  tasks  is  most  useful  to  a  business 
manager  only  when  the  tasks  are  determined,  not  on  the  basis  of  how 
much  a  man  can  do  for  one  day,  but  how  much  he  can  do  comfortably 
every  day  without  undue  fatigue.     Explain  why  this  statement  is  true. 

29.  What  is  an  organization  chart  of  a  business?  Is  it  a  "control 
system"  or  merely  a  picture  of  a  control  system?  Could  an  organiza- 
tion chart  be  drawn  of  a  school  .system  ?  Just  what  is  the  usefulness 
of  an  organization  chart? 

30.  Just  why  does  the  "technical  expert"  play  a  greater  part  in 
modern  industry  than  he  did  in  medieval  indu.stry? 

31.  How  should  you  define  "scientific management"?  What  is  its 
significance  with  respect  to  the  guidance  of  economic  activity? 

32.  Upon  which  phase  of  the  matter,  (a)  the  apportionment  of 
social  energy  among  various  industries  and  industrial  plants,  or  (6)  the 
conduct  of  operations  within  an  industrial  unit,  does  the  technical 
expert  have  more  influence?   the  financier? 

33.  Make  an  outline  of  the  main  points  in  the  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  Selections  332-335. 
Jones,  The  Administration  of  Industrial  Enterprises. 


STUDY  XXIII 
THE  WISE  UTILIZATION  OF  NATURAL  RESOURCES 

PURPOSES  OF  THIS  STUDY: 

1.  To  study  the  use  of  some  of  our  important  natural  resources. 

2.  To  survey  some  of  the  agencies  working  for  a  better  utilization  of 

natural  resources. 

Society's  productive  resources  should  be  wisely  utilized.  — 
Since  the  very  beginning  of  our  study  of  how  our  wants  are 
gratified,  we  have  seen  the  importance  of  natural  resources, 
labor  power,  capital  goods,  and  acquired  knowledge  and  organ- 
ization. These  constitute  the  fund  of  productive  energy  of  our 
society.  They  are  the  basic  materials  from  which  we  get  want- 
satisfying  goods.  They  are  society's  productive  assets.  The 
more  wisely  they  are  utilized,  the  better  will  our  wants  be  grati- 
fied ;  if  they  are  not  wisely  utilized,  so  much  the  worse  for  want- 
gratification.  Throughout  our  work  we  have  had  our  attention 
repeatedly  called  to  efforts  to  make  better  use  of  all  our  re- 
sources. 

It  will  be  worth  while  to  spend  some  study  upon  our  natural 
resources.  Concerning  them  three  matters  are  perhaps  of  most 
interest.  (1)  What  is  the  extent  or  available  supply  of  our 
more  important  natural  resources ;  (2)  what  are  some  of  the 
methods  employed  in  using  these  resources;  (3)  what  efforts 
are  being  made  to  improve  these  methods? 

The  natural  resources  which  are  of  greatest  value  to  us  come 
readily  to  the  minds  of  every  one.  Every  day  we  see  some  of 
the  uses  made  of  coal,  petroleum,  wood,  gold,  silver,  copper,  and 
iron.  Almost  as  noticeable,  in  some  communities  at  least,  is 
the  use  of  water  power,  while  each  of  us  every  day  uses  some  of 
the  products  of  the  soil.     We  call  to  mind  less  frequently  the 

419 


420 


OUR  ECONOMIC   ORGANIZATION 


uses  of  manganese,  mica,  platinum,  lead,  zinc,  tin,  chromite, 
asphalt,  graphite,  stone,  sulphur,  gypsum,  and  clay. 

Power  important  for  modem  industry.  —  Production  like 
ours,  which  in  such  large  measure  uses  machines,  needs  power 
in  immense  amount.  Coal,  water  power,  and  petroleum  are 
the  great  sources  from  which  most  of  our  power  comes.  Let  us 
give  our  attention  to  these  energy  resources. 

Our  coal  resources.  —  The  increasing  demands  made  upon 
our  coal  supply  are  well  shown  in  the  following  chart. 


6,000,000,000 

TONS 

4,000,000,000 

TONS 

3,000,000,000 

TONS 

/          z 

2,000,000,000 

TONS 

A 

1                   H 
CO 
O 

1,000 

in 

z 

o 

(- 

000,^•000 

00 

58  TONS 

o 
z 
at 

1,614  TON! 

(0 

z 
o 

H 

in 

z 
o 

►- 

-<n 

'-  z 

:S2 

lO 

ir 

n 

I- 
o 

1834         1836-'44       1845-'54    1856-'e4    1865-'74    1875-'84     18S5-'84    1896-1804    1806-'«4 

Production  of  Coal  by  Tons  in  the  United  States  by  Decades 
FROM  1834  to  19141 


For  some  years  we  have  been  using  about  half  a  billion  tons 
of  coal  a  year.  In  1918  there  were  produced  in  the  United 
States  684,710,000  tons  (short)  valued  at  $1,801,500,000.2 

Fortunately,  no  doubt,  for  the  continuance  of  machine  in- 
dustry, we  are  taking  this  large  annual  use  of  coal  from  a  large 
supply.  It  is  estimated''  that  on  January  1,  1920,  our  reserves 
were  about  3,533,688,000,000  tons  within  3000  feet  of  the  sur- 

»  Based  on  Marius  R.  Campbell,  The  Coal  Fields  uf  the.  United  States,  U.  S.  Geological 
Survey,  Professional  Paper  100-A,  p.  25. 

'  United  States  Geological  Survey,  Preliminaru  Report  of  the  Mineral  Resources  of  the 
United  Stales  in  1.918,  p.  'M>. 

'Cf.  Campbell,  op.  cit. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES      421 

face,  which  if  it  "  could  be  placed  in  one  great  cubical  pile  as 
solid  as  it  now  lies  in  the  ground  would  be  18  miles  long,  18 
miles  wide,  and  18  miles  high.  Similarly,  if  all  the  coal  that 
has  been  mined  in  the  United  States  plus  about  fifty  per  cent 
for  waste,  .  .  .  were  piled  in  the  same  way,  the  pile  would  be 
1540  feet  long,  1540  feet  wide,  and  1540  feet  high ;  or  in  other 
words  only  about  0.4%  of  the  original  amount  has  been  mined 
or  wasted  in  mining."  ^  At  our  present  rate  of  use  such  a  supply 
of  coal  might  be  calculated  to  last  more  than  4000  years.     It 


^ 

^ 

r- 

20,000,000,000  TONS   ^ 

16.000,000,000  TONS     / 

y 

10,000,000,000  TONS    / 

/ 

6,000,000,000  TONS    / 

/ 

o       «       o       o       «>      n              y 

ai 

1 

■* 

o 

01 

lO 

o 

a 
a 

o 

CM 

o 

o 

o 

o 

CM 

lO 

o 

—y — X\    *1    ' 

Estimated  Prodttction  (Tons)  of  Coal  in  the  United  States  to  the 
Year  2055,  by  Decades  Ending  in  the  Years  Cited ^ 


is  worth  while,  however,  to  notice  that  our  rate  of  consumption, 
in  the  past  at  least,  has  not  stood  still.  We  use  more  and  more 
each  year.  Not  only  is  this  true  but  we  are  rapidly  using  the 
"  more  accessible  parts  "  of  our  coal  supply  and  also  the  "  better 
parts  "  —  the  anthracite  and  high  grade  bituminous  coal.  More 
than  half  of  what  remains  is  sub-bituminous  and  lignite.  Viewed 
in  this  way  our  supply  does  not  appear  "  inexhaustible."  It  is 
of  course  impossible  to  estimate  with  certainty  the  speed  with 
which  we  will  consume  coal  in  the  future,  though  one  thorough 
student  of  the  subject  states  that  if  we  should  continue  at  our 
present  rate  of  increase  "the  supply  would  probably  not  last 

1  M.  R.  Campbell,  The  Coal  Fields  of  the  United  States,  U.  S.  Geological  Survey,  Profes- 
sional Paper  100-A,  p.  25. 

2  Based  on  M.  R.  Campbell,  The  Coal  Fields  of  the  United  States. 


422  OUR  ECONOMIC   ORGANIZATION 

one  hundred  years.  The  true  hfe  of  our  coal  fields  probably 
lies  between  these  two  statements,  and  the  probability  is  that 
it  will  be  nearer  100  years  than  4000  years."  ^  The  chart 
on  the  previous  page  shows  a  careful  estimate  of  our  use  of 
coal  until  2055. 

Coal  mining  methods. — The  methods  used  in  mining  coal  are 
well  described  in  one  of  the  federal  government's  publications, 

"In  the  mine  the  coal  is  either  blasted  from  a  solid  face — shot 
from  the  solid  —  as  in  hard-rock  mining,  or  is  shot  loose  or  otherwise 
broken  down  after  a  preliminary  cut  into  the  coal  has  been  made. 
This  cut  may  be  made  by  hand  or  by  machine.  Undergi'ound  meth- 
ods are  therefore  classified  as  shot  from  the  solid,  mined  by  hand,  and 
mined  by  machines.  An  increasing  quantity  of  coal  is  being  recovered 
each  year  by  stripping  the  cover  from  the  bed  in  open  pits  by  steam 
shovels.  The  bed  thus  exposed  is  for  the  most  part  shattered  by 
powder  and  shoveled  mto  cars  by  hand,  although  in  places  it  is  picked 
up  by  small  steam  shovels. 

"Opposition  to  shooting  from  the  sohd  has  developed,  because  it  is 
injurious  to  the  mining  property  in  that  the  im usual  charges  of  powder 
weaken  the  roof  and  pillars,  which  increases  the  liability  to  of  falls 
roof  and  coal,  the  most  prolific  cause  of  fatal  accidents  to  coal  miners. 
Another  objection  to  this  method  is  that  the  heavy  charges  of  powder 
required  to  blow  down  the  coal  where  it  has  not  been  previously  under- 
cut or  sheared  cause  the  production  of  a  very  high  proportion  of  fine 
coal  and  render  the  lump  coal  so  easily  breakable  that  it  disintegrates 
in  handling  and  in  transportation.  With  the  growing  use  of  mechanical 
stokers  and  of  powdered  coal  the  latter  objection  is  losing  much  of  its 
force,  but  the  danger  attending  the  method  has  been  in  no  wise  dimin- 
ished, and  it  is  forbidden  bylaw  in  some  of  the  coal-mining  States.  .  .  . 

"Mining  conditions  in  the  Pennsylvania  anthracite  region, where 
the  beds  are  steeply  inclined,  faulted,  and  folded,  are  quite  different 
from  those  in  the  greater  part  of  the  bituminous  regions,  where  the 
beds  are  usually  quite  regular  and  approximately  horizontal,  and  the 
methods  pursued  in  recovering  the  coal  are  correspondingly  different 
in  the  two  areas."  - 

•  M.  R.  Campbell,  The  Coal  Fields  of  the  United  States,  U.  S.  Geological  Survey, 
Professional  Paper  100-A,  p.   25. 

2  C.  E.  Lesher,  Coal  in  1916,  U.  S.  Geological  Survey,  Mineral  Resources  of  the  United 
States,  191G.     Part  II,  p.  917. 


WISE   UTILIZATION   OP  NATURAL   RESOURCES     423 

It  has  often  been  declared  that  such  methods  as  shooting  from 
the  sohd  are  wasteful  of  coal,  as  are  systems  of  mining  where 
pillars  of  coal  are  left  standing  to  support  the  mine  roof.  It  is 
worth  while,  however,  to  bear  in  mind  that  coal  mines  are 
usually  operated  for  a  profit  and  that  the  owner  probably  neither 
leaves  coal  behind  nor  spoils  coal  which  it  would  be  profitable 
to  save.  If  pillars  of  wood  were  used  instead  of  coal  pillars, 
or  if  men  were  employed  to  do  the  work  done  by  explosives,  it 
might  well  be  more  costly  than  the  methods  commonly  used. 

Coal  is  lost,  too,  after  mining.  Our  consumption  of  coal  in 
1917  was  6.4  tons  per  capita  on  the  basis  of  100,000,000  people, 
and  the  utihzation  of  this  large  amount  was  in  charge  of  a  great 
many  different  persons.  It  is  not  strange  that  a  considerable 
amount  is  lost.  Most  of  us  who  use  a  small  amount,  and 
even  many  furnace  and  engine  stokers,  do  not  know  the  best 
methods  of  laying  coal  to  make  possible  the  best  oxidation. 
The  direct  use  of  coal  by  thousands  of  small  users  also  makes 
impossible  the  conservation  of  the  manj^  by-products  which 
are  obtainable  from  this  mineral. 

Improvements.  —  Wherever  known  losses  are  occurring  one 
does  not  usually  look  far  to  find  improvements  being  developed. 
In  the  careful  research  and  instruction  of  our  schools  of  mining 
engineering  and  in  the  inventions  of  better  mining  machinery 
one  sees  a  lessening  of  the  losses  in  coal  and  other  minerals. 
So  in  the  burning  of  coal  we  find  mechanical  stokers  devised 
which  insure  thorough  combustion.  Smoke  consumers  also 
have  been  invented  which  in  some  cases  make  it  pay  to  utilize 
the  heated  gas  that  ordinarily  escapes  up  the  chimney.  Such 
smoke  consumers  bring  an  additional  saving  to  the  public  at 
large  by  lessening  the  amount  of  soot  and  gas  that  might  dam- 
age property  and  health. 

The  work  of  the  federal  government.  —  Not  only  do  technical 
schools,  individual  coal  consumers,  inventors,  and  many  mine 
owners  work  to  reduce  the  losses  of  coal,  but  a  very  important 
part  is  played  in  this  work  by  the  United  States  Government. 
Especially  important  is  the  work  of  the  Bureau  of  Mines.     The 


424  OUR  ECONOMIC   ORGANIZATION 

work  of  this  bureau  in  aiding  in  the  wise  utihzation  of  coal  (and 
a  large  number  of  other  resources  as  well)  is  suggested  in  the 
report  of  the  Director  for  1919.  Some  of  the  results  of  a  year's 
work  are  listed  as  follows :  ^ 

"1.  In  cooperation  with  the  War  and  the  Navy  Departments 
continued  work  on  plants  for  recovering  helium,  a  rare  gas  needed  for 
balloons  and  airships,  from  natural  gas  and  demonstrated  the  merits 
of  the  processes  used. 

"2.  Investigated  mining  and  milUng  problems  at  mineral  deposits 
throughout  the  country  in  order  to  ascertain  the  available  supply  of  war 
minerals,  and  how  these  minerals  could  be  produced  more  efficiently. 

"3.  Issued  reports  showing  the  markets  for  various  ores,  minerals, 
and  metals,  and  giving  data  on  the  status  of  various  mineral  industries. 

"4.  Completed  a  comprehensive  review  of  the  explosion  tests  of 
coal  dust  at  the  experimental  mine  near  Bruceton,  Pa. 

"5.  Determined  the  value  of  the  geo phone,  a  device  for  detecting 
sounds  transmitted  through  coal  and  rock,  in  recovery  work,  with 
special  reference  to  its  use  in  locating  mine  fires  and  in  communicating 
with  miners  entombed  by  a  disaster. 

"6.  Continued  the  study  of  the  subsidence  of  the  surface  over  coal 
mines  in  Illinois  in  order  to  ascertain  what  system  of  mining  will  do 
the  least  damage  at  the  surface  while  permitting  the  largest  recovery 
of  coal. 

"7.  Through  field  demonstrations  showed  operators  and  well 
drillers  how  large  wastes  of  oil  underground  may  be  prevented  by 
cementing  oil  wells  so  as  to  prevent  water  from  entering  the  oil  sands. 

"8.  Determined  the  advantage  of  the  circulator  method  of  driUing 
oil  wells. 

"9.  Determined  the  effects  of  various  factors  on  the  production  of 
gasoline  from  heavy  oils  by  the  vapor-phase  cracking  process. 

"10.  Demonstrated  the  value  of  absorption  for  recovering  gasoUne 
vapors  in  the  residual  gas  from  compression  plants  for  obtaining 
gasoline  from  natural  gas. 

"11.  Gave  further  attention  to  the  recovery  of  oil  from  the  oil 
shales  of  Colorado  and  Utah. 

'  In  this  list  of  activities,  many  are  given  which  have  nothing  to  do  with  coal  mining. 
The  student  need  not  bo  di.sturbed  if  he  does  not  understand  all  of  the  atatement.s  made. 
He  will  be  helped  to  appreciate  the  great  variety  of  tasks  performed  by  the  Bureau 
of  Mines. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     425 

"12.  Continued  investigations  of  the  fusing  temperature  of  the  ash 
of  different  coals  in  order  to  show  the  hability  of  the  coals  to  clinker. 

"L3.  Ascertained  the  suitability  of  American  graphites  for  various 
purposes. 

"14.  Began  a  comprehensive  investigation  of  the  white  clays  of  the 
United  States  and  the  value  of  these  clays  in  the  ceramic  industry." 

Further  effort  needed.  —  While  science  and  technology  may 
always  be  expected  to  accomplish  much,  there  may  be  need  for 
more  basic  changes  if  we  would  look  for  a  satisfactory  coal 
supply  in  the  future  as  well  as  in  the  present.  Some  persons 
who  have  investigated  the  matter  with  great  care  believe  that 
we  shall  need  to  modify  our  present  competitive  methods  in 
coal  mining  by  much  more  extensive  social  regulation  than  now 
exists,  if  we  are  to  make  the  best  use  of  our  coal  fields. 

"Scattered  and  unorganized,  most  of  the  indi\ddual  companies  are 
small  and  financially  weak;  no  adequate  cooperation  in  engineering 
practice  exists ;  new  developments  are  slow  of  growth ;  coal  is  mined 
for  the  most  part  by  obsolescent  long-estabUshed  practice.  .  .  . 
Many  districts  have  been  burdened  with  a  leasing  system  that  obligated 
the  company  to  remove  a  given  tonnage  each  year,  irrespective  of 
market  demand  or  price,  with  the  result  that  the  richest  spots  were 
drawn  from  seam  after  seam  with  irretrievable  loss  to  present  needs. 
Miners'  unions  in  general  have  fixed  wages  on  the  basis  of  thick  and 
easily  worked  seams,  and  imposed  such  severe  penalties  upon  inferior 
conditions  that  the  operator  is  precluded  from  introducing  new  and 
improved  methods.  Upon  all  this  the  policy  of  the  government  as 
exemplified  in  its  anti-trust  laws  has  forbidden  combinations  and 
restrained  cooperation,  with  the  result  that  large-scale  standardized 
operation  is  practically  lacking  in  the  mining  of  coal.  Coal  cannot 
be  mined  effectively  under  the  present  system.  The  nature  of  the 
resource  demands  integration.  .  .  .  Coal  is  a  necessity  which  does 
not  lend  itself  to  competitive  mining.  ...  In  short,  coal  as  a  re- 
source demands  cooperative  measures  of  development."  ^ 

Some  of  our  petroleum  wastes.  —  Every  one  is  familiar 
with  petroleum,  or  with  some  of  its  derivatives,  as,  for  example, 

1  Chester  G.  Gilbert  and  Joseph  E.  Pogue,  The  Energy  Resources  of  the  United  States:  A 
Field  for  Reconstruction.    United  States  National  Museum,  Bulletin  102,  Vol.  I,  pp.  23-26. 


426 


OUR   ECONOMIC   ORGANIZATION 


gasoline.  As  a  crude  product  petroleum  comes  from  the  earth 
in  an  oily  liquid  varying  considerably  according  to  the  locality 
from  which  it  comes.  It  is  obtained  in  commercial  quantities 
by  drilling  wells  into  the  crust  of  the  earth.  Several  different 
methods  of  drilhng  are  known  and  the  oil  well  is  usually 
marked  by  a  tall  wooden  framework  called  a  derrick  which 
forms  the  support  for  the  drilling  implements.  When  oil  "  is 
struck,"  which  may  be  at  a  depth  varying  from  a  few  hundred 


Courtesy  Smithsonian  Institution,  U.  S.  National  Museum 
View  of  the  Occurrence  of  Oil  and  Gas  in  Pools 

The  heavy  black  strips  represent  oil.  The  white  pockets  above  the  oil 
represent  gas.  The  white  below  the  oil  represents  water.  The  gray  represents 
rock. 


feet  or  less  to  thousands  of  feet,  the  petroleum  may  spurt  forth 
in  a  great  stream  under  the  influence  of  natural  gas  held  in 
folds  under  pressure.  Other  wells  furnish  oil  only  under  the 
inducement  of  pumping. 

The  general  practice  of  quitting  a  well  when  no  more  oil  comes 
from  it  is  said  by  engineers  to  leave  behind  more  than  half  of 
the  oil  "  still  clinging  to  the  pores  and  capillary  spaces  in  the 
rock."  1     To  obtain  this  oil  profitably  is  a  great  engineering 

>  Chester  G.  Gilbert  and'Moseph  K.  I'ogue,  The  Energy  Resources  of  the  United  States:  A 
Field  fur  Reconstruction.     United  States  National  Maseum,  Bulletin  102,  Vol.  I,  p.  38. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     427 


problem.  When  a  gusher  well  is  struck,  that  is,  one  from  which 
the  oil  comes  without  pumping,  much  oil  has  been  lost  be- 
cause facilities  for  catching  and  storing  the  product  have  not 
always  been  available.  "  Lakes  of  oil  "  gather  from  which 
much  escapes  through  seepage  and  evaporation.  Great  fires 
of  such  oil  lakes  are  not  uncommon.  One  of  the  most  perplex- 
ing problems  in  connection 
with  the  proper  utilization 
of  our  petroleum  supply 
comes  from  the  way  in 
which  it  is  found  in  the 
earth  and  from  the  system 
of  small  unit  drilling.  The 
objection  to  this  system  be- 
comes clear  when  we  under- 
stand that  the  petroleum 
which  we  have  been  using 
has  been  found  in  "  pools."  ^ 
If  an  owner  or  lessee  of 
oil  land  is  successful  in  find- 
ing oil,  all  other  persons  who 
own  the  right  to  drill  in  the 
same  neighborhood  are  anx- 
ious to  sink  wells  as  near  the 
successful  one  as  possible 
and  to  sink  as  many  as  they 
can  before  their  competitors 
draw  off  the  entire  pool 
through  their  wells.  This 
struggle  to  get  as  much  as  possible  from  the  pool  frequently 
results  in  haste  and  the  production  of  more  oil  than  can  be 
taken  care  of  at  the  moment.  It  is  a  case  where  the  operator 
must  work  hastily  and  with  some  loss  of  oil  or  perhaps  secure 
nothing.  The  struggle  among  different  operators  is  well  shown 
in  the  diagram  above. 

'  United  States  National  Museum,  Bulletin  102,  Vol.  I,  p.  31. 


« 

I 

•  •  •• 

••  •  • 

•  •  •  ••• 

• 

•  • 

• 
• 

• 
• 

•  •  • 

• 

•  •  • 

• 
: 

« 
• 

•  •••••••• 

•  •             • 

•  .             • 

:  •    •      • 

•  •••  • 
••   • 

•  •  •   • 

; 

• 

• 
•       • 

• 

•  •  •• 

•  • 

•  • 

•  •  * 

•  •  •    • 

•  •  *  • 

•  •  ■ 

• 
• 

• 

•   •   • 

•  •  • 

.  .    . 

0 'A  V2  3/4  1  Mile 


Diagram  Showing  the  Relation  of 
Oil  Wells  to  Property  Lines 

Note  the  small  holdings,  excessive  num- 
ber of  wells,  and  the  tendency  of  wells  to 
occur  in  pairs  on  opposite  sides  of  prop- 
erty lines.  Data  from  Bulletin  658,  U.  S. 
Geological  Survey,  1917,  Plate  4. 


428  OUR   ECONOMIC   ORGANIZATION 

Many  persons  who  are  most  interested  in  better  methods  of 
production  in  petroleum  advise  that  our  present  method  of 
leasing  under  small  unit  operation  must  give  way  to  some  other 
form  of  production  if  we  are  to  secure  our  petroleum  supply 
with  less  loss.  "  Neither  technology  nor  law  can  meet  the 
issue  unaided  —  and  no  one  wants  the  autocratic  method,  good 
or  bad.  .  .  .  Must  we  admit  that  to  gain  a  legitimate  service 
from  petroleum  we  must  sacrifice  nine  tenths  of  the  resource? 
Such  a  necessity  indeed  does  exist  so  long  as  the  petroleum  re- 
source is  left  subject  to  the  untrammeled  operation  of  the  law 
of  supply  and  demand  —  under  conditions  of  unrestricted  com- 
petition in  production.  The  first  step  toward  betterment 
would  logically  be  to  disfavor  small  holdings.  In  the  case 
of  private  oil  lands  a  constructive  policy  will  favor  and 
facilitate  integration  at  least  up  to  the  point  where  each 
geological  unit  (i.e.  a  pool)  is  occupied  by  a  single  producing 
activity."  ^ 

Our  store  of  petroleum.  —  Our  interest  in  petroleum  may  be 
stimulated  if  we  realize  the  immense  use  which  we  make  of  this 
resource.  The  following  chart  will  give  us  a  vivid  picture  of 
the  situation. 

Our  present  knowledge  indicates  that  more  than  one  third 
of  our  supply  is  already  used,  and  while  we  may  hope  for  great 
discoveries  of  new  fields  in  the  future,  the  fact  that  between 
1908  and  1916,  during  which  time  the  most  active  exploration 
campaign  in  the  history  of  oil  development  was  carried  on,  the 
reserve  of  natural  petroleum  was  enlarged  by  only  1200  million 
barrels,  a  scant  three  years'  supply  at  the  present  rate  of  con- 
sumption, does  not  make  this  hope  as  comforting  as  we  might 
wish.  Though  our  reserve  of  natural  petroleum  is  low,  we  have 
a  vast  reserve  of  oils  in  the  oil-producing  shales  of  certain  states. 
It  is  estimated  that  these  oil  shales  in  Wyoming,  Colorado, 
and  Utah  will  yield  seventy-five  billion  barrels^  of  oil.  There 
are  other  less  important  fields  in  other  parts  of  the  United 
States.     One  of  the  most  important  of  these  is  in  Southern 

'Adapted from  United  States  National  Museum,  Bulletin  102,  Vol.  I,  pp.  90-92. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     429 


Indiana.     The  oils  secured  from  these  shales  can  be  used  for 
the  purposes  for  which  we  now  use  petroleum. 


1870    1880    1890    1900    1910    1920    1930 


200,000,000 


100,000,000 


Chart  Showing  the  Present  Tendency  of  the  United  States 
IN  Respect  to  its  Unmined  Reserve  of  Natural  Petroleum  ' 

Water  power.  —  Water  power  is  the  third  great  source  of 
power  in  the  United  States.  It  is  said  that  one  may  state  our 
annual  consumption  of  energy  in  terms  of  700,000,000  tons  of 
coal,  plus  400,000,000  barrels  of  petroleum  plus  6,000,000  horse 
power  of  hydro-electricity. 

When  coal  and  petroleum  are  considered  it  is  the  inefficiency 
in  the  use  of  resource  that  attracts  the  attention  of  conser- 
vationists. When  water  power  is  the  matter  under  considera- 
tion, it  is  the  lack  of  use  which  in  large  part  gives  rise  to  concern. 
While  we  are  considering  water  resources  it  is  well  to  have  in 
mind  the  vital  value  of  water  as  a  drinking  supply,  its  use  for 
transportation  and  its  extensive  possibilities  for  irrigation. 
We  will  consider  particularly,  however,  the  matter  of  power. 

The  United  States  Geological   Survey  estimates  that   the 


'  From  United  States  National  Museum,  Bulletin  102,  Vol.  I,  p.  54. 
Geological  Survey. 


Data  from  U.  S, 


430 


OUR  ECONOMIC   ORGANIZATION 


water  courses  of  the  United  States  have  at  their  minimum  flow 
36,000,000  horse  power  and  that  this  could  be  increased  five 
times  by  developing  all  storage  possibilities.  ^  While  one  of 
these  estimates  is  at  the  minimum  and  the  other  perhaps  at  the 
maximum,  it  has  also  been  estimated  that  there  are  fifty -five  or 
sixty  million  horse  power  which  we  can  think  of  as  within  the 
range  of  practicable  possibilities.  The  relation  of  developed 
to  undeveloped  water  power  can  be  shown  diagrammatically.^ 

One  may  wonder  at  first 
that  so  much  of  our  potential 
water  power  is  unused. 
Water  power  is  called  a  free 
gift  of  nature,  but  we  must 
not  forget  that  it  is  not 
usually  free  without  great 
expenditure  of  our  other  re- 
sources. In  modern  society 
where  we  use  the  powerful 
motive  of  self-interest  to  get 
goods  produced  in  the  least 
expensive  way,  it  is  not 
strange  that  the  use  of 
coal  and  oil  has  retarded 
the  development  of  water 
power. 
In  any  event,  it  is  comforting  to  realize  that  we  have  such  a 
vast  potential  power  resource  in  reserve  even  if  it  may  cost 
us  more  to  use  it  than  it  costs  at  present  to  use  coal  and  pe- 
troleum. This  source  also,  if  properly  administered,  is  literally 
inexhaustible.     Rivers  "  flow  on  forever." 

The  question  of  water  conservation  like  that  of  conservation 
of  other  energy  resources  raises  considerations  of  different  types. 
One  is  a  question  of  general  public  policy.  Should  we  use  some 
methods  other  than  self-interest  and  competition  guided  by 
market  demand,  to  bring  about  a  dcvclopniont  of  water  power? 

»  Walter  McCulloch,  C.  E.,  Water  Conservation,  p.  37.  '  Ibid.,  p.  38* 


Status  of  Water  Power  in  the 
United  States  in  1909 

Compare  Walter  McCulloch,  C.  E., 
Water  Conservation,  p.  38. 


WISE   UTILIZATION   OF   NATURAL   RESOURCES     431 

Some  persons  believe  that  the  federal  government  should  take 
steps  to  stimulate  the  building  of  hydro-electric  plants,  and 
especially  of  transportation  lines  for  electric  power.^  Some 
added  weight  is  given  to  this  argument  when  it  is  pointed  out 
that  water  conservation  is,  in  the  case  of  many  rivers,  quadruple 
conservation.  Not  only  may  power  be  saved  by  water  con- 
servation, but  a  drinking  water  supply  is  insured,  navigation 
possibly  improved,  and  irrigation  made  possible.^  It  may  well 
be  possible  that  wise  water  utilization  (like  the  construction  of 
lighthouses,  the  building  of  streets  and  sewers,  the  quarantining 
of  contagious  diseases,  and  the  construction  of  recreation  parks) 
may  offer  more  for  the  public  good  than  a  private  business  can 
conveniently  get  out  of  it  and  therefore  needs  some  support 
from  society  at  large.^ 

Waiving  aside  differences  of  opinion  (which  always  exist) 
concerning  the  wisdom  of  governmental  intervention,  probably 
all  can  agree  that  appropriate  action  would  vary  with  individual 
cases  under  consideration  and  would  undoubtedly  depend  upon 
the  values  to  be  secured  in  any  individual  case. 

"It  is  obvious  that  the  flood  waters  pouring  through  the  valley  of 
some  mountain  stream  may  have  enormous  power  possibilities,  and 
upog  reacliing  the  lowlands  may  inundate  large  areas  of  fertile  land ; 
but  if  there  is  no  market  for  the  water  power,  or  if  the  flooded  lands 
are  not  under  cultivation,  there  is  no  present,  detenninable  value  to 
the  unused  power,  nor  is  there  any  real  damage  done  to  the  lands  which 
are  flooded.  On  the  other  hand,  the  same  volume  of  water  issuing 
from  the  liill  country  of  New  England  may  cause  a  damage  to  cultivated 
lands  and  to  municipalities  to  the  extent  of  thousands  of  dollars,  and 
at  the  same  time  the  wasted  water  power  would  have  a  value  double 
or  treble  the  amount  of  damage  done.  In  the  latter  case,  the  need  for 
and  the  value  of  water  storage  is  apparent  and  is  a  positive  fact,  while 
in  the  former  no  such  fact  exists  at  the  present  time."  ^ 

'  See  for  example,  C.  G.  Gilbert  and  J.  E.  Pogue,  Bulletin  102,  Vol.  I,  National  Museum, 
1919,  under  discussion  Power. 

'  G.  F.  Swain,  Conservation  of  Water  by  Storage,  p.  24. 

'  Ibid.,  p.  29,  for  a  discussion  of  opposing  views  on  this  matter. 

*  Walter  MeCulloch,  C.  E.,  Water  Conservation,  pp.  13-14. 


432 


OUR   ECONOMIC   ORGANIZATION 


Courtesy  of  the  U.  S.  Reclamation  Service 
The  Desert  Before  and  After  Irrigation 

The  upper  picture  shows  the  desert  covered  with  sagebrush,  illustrating  the 
condition  cf  hinds  before  water  is  applied.  The  lower  picture  shows  the  desert 
reclaimed  !>>'  irrigation. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     433 

There  remains  in  a  study  of  water  conservation  the  second 
major  consideration  —  the  engineering  problem  involved.  It 
is  easy  to  see  that  the  questions  of  public  policy,  of  law, 
and  engineering  considerations  are  interrelated.  If  engineers 
can  find  ways  of  producing  new  water  power  more  cheaply 
than  power  from  oil  or  coal,  and  laws  are  not  so  stringent  as  to 
restrain  activity,  we  may  be  sure  that  water  power  will  be 
used.  On  the  other  hand  it  may  be  decided  to  be  good  pubhc 
policy  to  develop  water  power  even  when  it  does  not  pay  in  the 
market.  In  either  event,  there  are  great  engineering  feats  to  be 
accomplished.  The  engineering  problems  involved  in  water 
conservation  for  power  will  be  better  understood  if  we  realize 
that  "  the  value  of  any  water  power  is  directly  proportional  to 
the  volume  passing  over  the  fall  everj'-  second  and  the  uniform- 
ity of  the  flow."  '  Large  volume  of  flow  over  a  high  fall  is  of 
little  value  if  the  flow  is  only  for  a  short  period  such  as  we  might 
find  during  a  flood,  while  a  large  and  constant  flow  over  a  much 
lower  fall  would  be  of  greater  value.  The  more  ideal  power 
value  is  found  in  streams  which  approach  a  constant  uniform 
volume.  The  steadiness  of  stream  flow  has  been  said  to  de- 
pend upon : 

"  1.   The  size  of  the  drainage  area  above  the  point  considered. 

"2.   The  shape  of  this  area. 

"  3.   Its  geological  character. 

"  4.   Its  topographical  character. 

"  5.  The  surface  conditions,  such  as  the  extent  of  forested  area 
within  the  drainage  basin,  the  area  of  swamp  land,  the  area  under 
cultivation,  etc. 

"  6.  The  extent  and  location  of  lakes  or  artificial  reservoirs,  and 
their  manner  of  control. 

"  7.   The  meteorological  conditions  affecting  the  drainage  area."^ 

The  variations  in  the  flow  of  certain  rivers  is  illustrated  in 
a  rather  extreme  way  by  the  Merrimac  River,  which  in  one  year 
showed  a  discharge  more  than  thirteen  times  as  great  during 

'  Walter  McCulloeh,  C.  E.,  Water  Conservation,  p.  37. 

'  George  Fillmore  Swain,  Conservation  of  Water  by  Storage,  p.  156. 


434 


OUR  ECONOMIC   ORGANIZATION 


certain  days  in  the  spring  than  it  did  during  the  dry  seasons  of 
the  year.  The  Androscoggin  in  Maine  in  the  same  way  showed 
a  discharge  in  certain  days  of  the  spring  flood  more  than  ten 
times  as  great  as  the  flow  at  any  time  in  August.  The  control 
of  the  flow  of  the  stream  is  therefore  one  of  the  most  important 
engineering  problems  in  connection  with  water  power.     Storage 


Courtesy  U.  S.  Reclamation  Hervice 
The  Roosevelt  Dam,  Near  Phcenix,  Arizona 


Height  of  dam,  284  feet 
Length,  top,  910  feet 
Thickness  at  base,  168  feet 
Thickness  at  top,  20  feet 


Reservoir  holds  1,367,305  acre  feet  of  water. 
Stores  water  for  219,000  acres  of  land  in  Salt 
River  Valley,  Arizona.  Below  tlu>  dam  is  a 
power  house  where  7500  horse  power  la 
developed. 


is  the  great  method  employed.  Two  chief  means  are  under- 
taken. One  is  the  construction  of  surface  reservoirs.  The 
construction  of  storage  dams  requires  of  the  engineers,  studies 
from  a  great  many  points  of  view.  There  is,  of  course,  first  of 
all  the  economic  question.  Will  the  benefit  be  worth  the  cost? 
There  is  next  the  needed   topographical  survey  to  ascertain 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     435 

whether  or  not  there  are  suitable  sites  for  reservoirs  and  favor- 
able locations  for  dams.  It  is  of  course  desirable  if  possible 
to  hold  back  a  large  volume  of  water  with  as  short  a  dam  as 
possible  and  to  avoid  at  the  same  time  spreading  water  over 
land  which  is  valuable  for  agriculture  or  other  purposes.  The 
economic  and  topographical  studies  must  be  supplemented  by 
geological  examinations.  The  underlying  rock  structure  will 
have  much  to  do  with  determining  the  safety  of  any  reservoir 
built  and  the  design  which  can  wisely  be  used.  The  rainfall 
in  the  area  concerned  and  the  record  of  stream  flow  will  be 
needed  and  can  be  had  onl}'  after  hj'drographic  and  meteoro- 
logical studies  have  been  made. 

The  construction  of  the  dam  itself  requires  a  knowledge  of 
the  technique  of  hydraulic  engineering,  which  is,  of  course, 
a  matter  into  which  we  cannot  go  here,  but  which  may  be  con- 
cerned with  building  the  dam  or  reservoir,  the  intake  or  conduit 
which  is  to  convey  the  water  to  a  power  house,  the  power  house 
itself  and  the  installation  of  its  turbines,  generators  and  other 
machinery,  and  the  lines  which  are  to  transmit  electric  power 
from  the  power  house  to  the  point  of  utilization. 

The  second  means  of  controlling  water  is  by  forests.  This 
method  of  control  is  so  closely  related  to  the  whole  question 
of  forest  conservation  that  it  may  well  be  treated  under  a 
separate  head. 

Extent  of  our  forests.  —  The  original  forests  of  the  United 
States  were  very  extensive.  All  of  that  section  of  the  country 
which  extends  through  the  upper  New  England  States,  New 
York,  most  of  Pennsylvania,  northern  Wisconsin,  Michigan, 
and  Minnesota  was  covered  with  what  was  known  as  the  "  great 
northern  forest."  The  trees  of  this  forest  were  for  the  most 
part  various  varieties  of  pine  and  especially  of  the  famous  white 
pine.  South  of  this  great  forest  was  another  covering  Ohio, 
Kentucky,  Tennessee,  parts  of  Indiana,  Illinois,  Iowa,  and 
Missouri  and  extending  south  to  Oklahoma,  Texas,  and  the 
northern  edge  of  the  states  which  border  on  the  gulf.  This 
forest  contained  for  the  most  part  hardwood  trees,  such  as  oak, 


436  OUR  ECONOMIC   ORGANIZATION 

walnut,  hickory,  and  maple.  The  southern  coast  states  were 
covered  with  a  growth  of  coniferous  trees,  of  which  the  yellow 
pine  was  the  most  numerous.  The  Rocky  Mountains  were  also 
partly  covered  with  trees — fir,  redwood,  and  one  or  two  varieties 
of  pine  being  the  most  plentiful.  The  forest  growths  of  the 
Pacific  coast  contained  the  giant  firs  and  redwoods  which  have 
made  California  famous  for  trees. 

The  total  numbers  of  acres  covered  by  the  original  forests 
was  at  least  850,000,000  and  contained,  it  is  estimated, 
5200  billion  board  feet  of  salable  timber.  The  tremendous 
use  which  we  have  made  of  wood  has  reduced  this  forest  wealth 
by  approximately  one  half,  although  the  United  States  still 
contains  some  500,000,000  acres  of  timber. 

The  present  extent  and  situation  of  our  forests  are  concisely 
expressed  as  follows : 

"  Of  this  total  forest  area  of  500  million  acres : 

"  100  million  acres  and  more  are  so  devastated  as  to  be  almost 
wholly  nonproductive. 

"Ov^r  250  million  acres  have  been  cut  over  and  more  or  less  dam- 
aged by  fire,  but  are  producing  new  timber,  usually  in  small  amounts. 

"150  million  acres  are  in  standing  timber  where  growth  merely  bal- 
ances decay,  with  no  net  increase  in  wood  production  from  year  to 
year.  On  a  large  part  of  this  area  the  virgin  timber  is  of  poor  quality 
and  very  inaccessible. 

"Of  the  500  million  acres  of  forest  land,  400  million,  in  round  num- 
bers, are  in  private  ownership,  and  100  million  are  publicly  owned. 
Most  of  the  publicly  owned  timber  is  in  the  National  Forests,  whose 
total  area  is  about  155  million  acres  in  all.  This  figure  includes  lands 
above  timber  line,  parks  temporarily  deforested,  old  burns,  etc.,  so 
that  the  area  actually  under  forest  at  this  time  is  much  smaller.  Be- 
cause it  is  of  poor  average  quality  and  hard  to  reach,  it  will  be  many 
years  before  the  National  Forest  timber  can  play  any  considerable 
part  in  the  general  timber  market. 

"Eighty  per  cent  of  our  standing  merchantable  timber  is  privately 
owned. 

"Ninety-seven  per  cent  of  our  annual  cut  comes  from  privately 
owned  forests. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES    437 

"By  reason  of  their  extent,  quality,  and  location,  the  forest  lands 
now  in  private  ownership  have  always  furnished  and  must  always 
furnish  the  great  bulk  of  the  Nation's  timber  supply."  ^ 

Losses  in  forest  use.  —  Very  serious  losses  have  occurred 
in  the  utilization  of  forest  wealth.  American  lumbering  has 
been  carried  on  usually  in  such  a  way  as  to  leave  the  brush  and 
slashings  in  whatever  condition  was  most  convenient.  Young 
trees  are  injured  through  the  fall  of  timber  and  the  handling 
of  logs.  Much  timber  it  has  not  paid  to  take  out,  especially  in 
the  western  and  southern  forests.  It  is  estimated  that  even 
within  the  last  ten  years  western  and  southern  loggers  "left  from 
20  to  30  per  cent  of  their  timber  in  the  woods.  It  has  been 
estimated  that  only  35  per  cent  of  the  actual  cubic  contents 
of  the  tree  is  utilized,  the  remaining  65  per  cent  being  lost  in 
the  stump,  in  saw-dust,  slabs,  trinnnings,  broken  timber,  and 
low-grade  logs  left  in  the  woods."  ^  It  is  to  be  noticed,  of  course, 
that  timber  has  been  thus  handled  because  it  did  not  pay  the 
owners  to  handle  it  otherwise.  Closely  related  to  this  loss  of 
timber  has  been  that  which  has  occurred  through  fires.  Ac- 
cording to  the  Forest  Service,  there  were  25,000  forest  fires 
in  1918.  One  of  these  was  the  great  Minnesota  fire  in  October 
of  that  year,  in  which  432  fives  were  lost,  200,000  acres  were 
burned  over  severe^  (consuming  or  killing  all  timber),  400,000 
acres  were  burned  over  lightly,  5000  homes  were  burned,  11 
villages  were  burned  entirely  and  5  partly,  and  $25,000,000 
of  property  was  lost. 

Such  losses  as  have  been  mentioned  are  supplemented  by 
neglect  to  reforest  lands.  Lumbermen  can  hardly  be  criticized 
for  not  replanting  their  lands.  The  investment  would  be  one 
which  would  not  mature  for  half  a  century  and  in  some  cases 
longer.  In  the  meantime  there  are  taxes  and  the  danger  of 
fire,  both  of  which  are  uncertain  and  too  arbitrary  to  make  the 
investment  a  conservative  one.     Tree  planting  has  been  called 

'  Gifford  Pinchot  and  others,  Forest  Devastation,  a  reprint  from  the  Journal  of  Forestry, 
Dee.  29,  1919,  p.  16. 

2  John  Ise,  The  United  States  Forest  Policy,  p.  360. 


438  OUR  ECONOMIC   ORGANIZATION 

a  "  risky  six  per  cent  investment."  ^  The  fact  that  it  does 
not  pay  the  private  owner  to  reforest  does  not,  of  course,  prove 
that  the  pubhc  interest  would  not  be  served  by  replanting. 

Important  among  the  losses  which  occur  from  our  forest 
policy  is  that  which  we  have  mentioned  earlier,  its  effects  on 
water  power.  The  rapid  flow  of  water  from  the  watershed  is 
checked  by  forests  partly  because  the  web  of  roots  and  humus  in 
a  forest  tends  to  hold  water  somewhat  as  a  sponge  does.  As 
a  result  the  water  seeps  away  slowly  instead  of  running  off  in 
a  flood  as  it  does  on  bare  slopes.  The  extension  of  forests 
therefore  is  a  method  of  water  control  which  is  being  more  and 
more  widely  urged  by  those  interested  in  conservation.  But 
the  relation  of  water  control  by  forests  to  soil  is  also  important. 
Every  one  who  has  seen  water  flow  over  the  ground  knows  how 
even  a  small  current  carries  along  the  surface  soil.  This 
process,  called  erosion,  is  devastating  to  sloping  lands  where  the 
flow  of  water  is  unretarded. 

What  agency  should  control  forests  ?  —  An  exhaustive  study 
of  the  remedies  proposed  for  improving  the  use  of  our  forests 
would,  as  in  the  case  of  our  other  resources,  take  us  far  from 
our  field.  We  will  notice,  however,  something  of  the  problems 
involved.  Important  is  the  general  question  of  pubhc  pohcy. 
Is  it  wise  for  us  to  abandon  our  method  of  gain  apportion- 
ment and  to  apply  further  measures  of  public  control  of  the 
forests?  That  there  are  dangers  in  extending  the  powers  of 
government  might  be  fairly  believed  from  the  experience  which 
we  have  had  in  the  past  with  forest  legislation  by  Congress. 
It  is  said  that  "  of  the  important  timber  land  laws  passed  in 
the  half-contury  during  which  our  forests  were  disappearing 
or  passing  into  the  hands  of  private  individuals,  only  two 
—  the  Forest  Reserve  Act  of  1891  and  the  act  of  1897  —  stand 
out  clearly  as  examples  of  intelligent  legislation ;  and  the  first 
of  these  was  secured  because  Congress  did  not  got  a  chance 
to   quash  it,  while  the  act  of   1897  was  drawn  by  a  *  theo- 

>  Kellogg  and  Ziegler,  The  Cost  of  Growing  Timber.  Published  by  American  Lumberman, 
quoted  in  Ise. 


WISE    UTILIZATION    OF   NATURAL   RESOURCES     439 


Courtesy  of  the  U.  S.  Fore^ Service 
Good  and  Bad  Lumbering 
/fop.  —  On  this  area  in  the  Black  Hills  National  Forest,  South  Dakota,  only 
the  mature  trees  have  been  removed,  the  stumps  have  been  cut  close  to  the 
ground,  and  the  brush  resulting  from  lumbering  operations  has  been  piled  pre- 
paratory to  burning. 

Bottom.  —  This  slope  was  formerly  forested.  It  is  now  being  rapidly  washed 
away  as  a  result  of  destructive  lumbering  and  overgrazing.  The  eroded  gullies 
are  from  10  to  20  feet  wide  and  from  6  to  13  feet  deep. 


440  OUR   ECONOMIC    ORGANIZATION 

retical '  scientist  and  pushed  through  Congress  on  an  appro- 
priation bill.  For  the  fact  that  the  United  States  finally  got 
some  national  forests,  with  a  scientific  system  of  administra- 
tion, credit  is  due,  not  to  the  wisdom  of  our  national  legisla- 
ture, but  entirely  to  administrative  officials  —  Schurz,  Cleveland, 
Sparks,  Walcott,  Fernow,  Bowers,  Pinchot,  Roosevelt,  and 
others ;  and  these  men  had  to  fight  Congress  at  almost  every 
step."  1 

One  agency  which  has  been  giving  useful  aid  has  been  the 
Forest  Service.  In  one  recent  year  the  Bureau  of  Forestry 
supervised* a  business  totaling  $3,574,930.07.  It  directed  the 
sale  of  wood,  the  grazing  of  cattle  and  sheep  in  the  national 
forests,  and  the  sale  of  uses  of  water  power.  It  made  exten- 
sive efforts  to  check  fire  losses,  cared  for  game,  and  made 
extensive  investigations  and  experiments  in  the  interests  of 
forestry.  It  administered  altogether  the  interests  of  155,374,602 
acres,  which  was  the  net  area  of  the  national  forests  on  June 
30,  1918.  In  handhng  its  great  task  the  Forest  Service  is 
organized  much  as  a  great  factory,  store,  or  other  business  unit 
is  organized. 

Soil  resources  are  important.  —  Space  cannot  be  given  to 
a  discussion  of  the  many  conservation  problems  which  have 
been  illustrated  by  the  resources  considered.  One  problem 
of  great  concern  is  that  of  soil.  The  wise  utilization  of  soil 
is  as  we  have  seen  closely  related  to  the  use  of  forests.  Erosion 
from  poorly  controlled  water  is  one  of  the  most  serious  losses  of 
productive  soil.  Closely  related  to  soil  conservation  also  arc 
the  considerations  of  irrigation  and  drainage.  The  Department 
of  Agriculture  has  estimated  that  there  are  some  75,000,000 
acres  of  wet  lands  in  the  United  States  of  which  a  considerable 
part  can  ultimately  be  reclaimed.  Irrigation  of  arid  lands  has 
been  practiced  from  earliest  recorded  time  in  Persia,  China, 
India,  and  other  countries.  It  is  a  very  old  device.  There  are 
probably  about  16,000,000  acres  in  the  United  States  which 
have  been  reclaimed  by  irrigation.     Thirty  million  acres  more 

•  John  lac,  The  United  Stales  Furcst  Policij,  p.  370. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES    441 


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442  OUR  ECONOMIC   ORGANIZATION 

can  be  made  available  by  this  means.  Here  again,  however,  we 
see  that  the  problem  of  reclamation  is  linked  with  the  problem 
of  water  and  forest  use. 

The  conservation  movement.  —  Much  of  the  discussion 
which  within  recent  years  has  taken  place  regarding  a  better 
utilization  of  our  natural  resources  and  many  of  the  devices 
which  we  are  slowly  and  laboriously  creating  to  reduce  the  losses 
which  we  now  experience  have  grown  up  as  part  of  what  is 
called  the  conservation  movement,  which  probably  had  its  be- 
ginning in  the  Forest  Service  Movement.  Its  formal  beginning 
dates  from  a  conference  of  governors,  suggested  by  Gifford 
Pinchot,  "  the  father  of  conservation,"  and  called  by  President 
Roosevelt  in  May,  1908. 

The  conservation  movement  as  a  whole  has  been  summarized 
as  follows  by  a  former  director  of  the  United  States  Reclamation 
Service  who  has  expressed  his  thoughts  in  terms  of  reconstruc- 
tion after  the  World  War. 

"  Conservation,  and  to  a  large  part  reconstruction,  at  the 
bottom  is  good  housekeeping.  It  involves  the  idea  of  thrift 
and  of  good  business  management.  The  present  age  differs 
from  those  which  have  gone  before  in  the  appreciation  of  the 
need  of  careful  and  scientific  study  of  natural  resources,  in  the 
weighing  of  costs  and  benefits  in  utilizing  these,  viz.,  in  the 
economics  of  their  use.  The  time  has  passed  when  the  well- 
informed  man  boasts  of  the  unlimited  resources  of  the  country ; 
it  is  no  longer  considered  a  mark  of  progress  to  permit  the  great 
coal  beds  to  be  carelessly  mined,  the  forests  to  be  freely  burned 
and  the  rivers  to  be  neglected.  The  study  of  the  management 
of  the  affairs  of  the  government  and  of  the  community  with 
reference  to  the  sources  of  income,  expenditures  and  develop- 
ment of  the  natural  resources  has  come  to  be  appreciated  as 
never  before. 

"  It  has  been  a  characteristic  American  trait  to  expatiate  upon 
the  natural  resources  of  our  country.  The  vastness  of  the  area 
and  of  the  mineral  wealth  appeals  to  the  imagination.  It 
seems  to  reflect  glory  upon  all  who  are  so  fortunate  as  to  be  in 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     443 

such  a  great  land.  Unconsciously  we  take  credit  to  ourselves 
for  these  resources  as  though  the  fact  that  we  are  hving  here 
attests  our  superiority  over  the  rest  of  the  world.  It  would 
be  more  fitting,  however,  instead  of  dwelhng  upon  our  own 
superior  merit  in  being  in  such  a  country,  for  us  to  feel  that 
these  resources  impose  a  corresponding  obligation  and  a  duty 
to  utilize  them  in  the  best  way  for  the  welfare  of  mankind.  .  .  . 
With  the  spread  of  reconstruction  demands  these  ideals  are 
being  realized  in  part ;  we  have  reason  to  be  greatly  encouraged 
when  we  look  back  over  the  history  of  the  past  ten  years  and 
see  the  awakening  of  the  public  conscience  and  the  support 
which  has  been  given  to  the  plans  of  conservation. 

"  Now,  as  never  before,  it  is  being  appreciated  that  a  nation 
like  an  individual  cannot  be  rich  without  proper  economy  and 
that  in  public  affairs,  as  in  private,  the  rules  of  thrift,  of  good 
housekeeping,  of  good  business  management,  must  be  ob- 
served." ^ 

If  we  review  the  facts  which  we  have  been  considering  in 
the  study,  we  shall  see  that  the  question  of  wise  utihzation  of  our 
natural  resources  is  not  an  easy  one  to  answer.  Great  quantities 
of  our  natural  resources  have  been  lost  during  our  use  of  them 
and  some  will  probably  always  continue  to  be  lost.  There 
seems  httle  reason  to  believe  that  we  shall  ever  succeed  in  making 
our  mechanical  and  engineering  devices  so  perfect  that  we  can 
get  100  per  cent  use  from  all  of  our  raw  materials.  A  second 
point  to  bo  noticed  is  that  it  has  paid  in  one  sense  at  least  to 
utilize  resources  imperfectly.  Persons  who  have  owned  forests, 
coal  fields,  oil  wells,  and  other  raw  materials  have  no  doubt 
usually  attempted  to  use  them  in  the  way  which  paid  best. 
This  has  unquestionably  given  society  many  products  at  less 
cost  than  they  could  otherwise  have  been  obtained.  We  have 
used  our  oil  wells  lavishly  and  our  coal  fields  freely,  but  this  is 
only  another  way  of  saying  that  we  have  had  a  high  standard 
of  hving.  We  have  obtained  more  than  most  other  peoples 
for  less  effort  expended.     There  is  no  denying,  however,  that 

>  Frederick  Haynes  Newell,  Water  Resources,  Present  and  Future  Uses,  pp.  29-30. 


444  OUR   ECONOMIC   ORGANIZATION 

even  in  terms  of  market  considerations  there  have  been  losses 
due  to  recklessness  and  a  lack  of  "  market  sense." 

The  question  at  issue  is  whether  it  is  desirable  for  our 
present  society  to  use  its  resources  as  rapidly  as  market  in- 
fluences suggest.  Is  it  perhaps  better  for  this  generation  to 
live  less  comfortably  in  the  hope  that  the  future  may  be  in 
a  better  situation  as  a  result?  If  one  believes  that  such  is  the 
case,  he  will  probably  decide  that  our  gain  method  of  apportion- 
ment and  private  ownership  are  imperfect  methods  when 
applied  to  certain  natural  resources.  If  one  believes  this, 
there  then  comes  the  puzzling  question:  what  methods  will 
be  more  satisfactory  than  those  now  in  operation? 

PROBLEMS 

1.  What  typeg  of  resources  has  society?  List  as  many  natural 
resources  as  you  can.  Wliat  types  of  society's  resources  seem  most 
likely  to  last  indefinitely? 

2.  "The  most  prominent  features  in  modern  civilization  are  closely 
connected  with  the  use  of  forms  of  natural  energy."  What  are  the 
chief  forms  of  natural  energy  ?  What  are  the  most  prominent  features 
of  modern  civilization  that  seem  closely  linked  with  the  use  of  these 
forms  of  energy? 

3.  What  is  our  annual  consumption  of  coal?  The  estimated 
supply?  The  percentage  of  supply  already  used?  The  estimated 
duration  of  supply?  What  factors  throw  uncertainty  into  attempts 
to  estimate  how  long  our  coal  supply  will  last  ? 

4.  Does  it  seem  to  you  it  would  be  desirable  to  forbid  shooting 
from  the  solid  and  require  by  law  more  careful  methods  of  mining  ? 
If  more  careful  methods  were  required  by  law  would  our  coal  prob- 
ably cost  more? 

5.  Would  we  use  more  of  our  other  social  resources  in  securing  our 
coal  than  we  use  when  shooting  from  the  solid  is  employed  ? 

6.  List  some  of  the  important  agencies  which  are  at  work  to  improve 
our  methods  of  using  mineral  wealth. 

7.  Of  the  "results  for  1919"  published  by  the  director  of  the 
Bureau  of  Mines,  which  ones  seem  to  you  most  significant? 


WISE   UTILIZATION   OF  NATURAL   RESOURCES     445 

8.  "The  nature  of  the  resource  demands  integration  .  .  .  coal  is  a 
necessity  which  does  not  lend  itself  to  competitive  mining  ,  .  .  coal 
demands  cooperative  measures  of  development . ' '  Explain  what  is  meant 
by  this  quotation.    What  argument  can  be  made  for  or  against  it? 

9.  Find  out  from  a  local  gas  manufactory  how  gas  is  produced. 
If  this  is  impossible,  get  a  report  of  gas  manufacturing  from  an  en- 
cyclopedia. 

10.  Suppose  you  were  drilling  for  oil.  Would  you  prepare  a  large 
storage  tank  before  you  had  "struck  oil "  ?  What  risks  would  you  take 
if  you  did  ?    Wliat  risks  would  you  take  if  you  did  not  ? 

11.  What  is  meant  by  a  "pool"  in  connection  with  oil  geology? 
"It  is  the  geology  of  oil  which  makes  competitive  drilling  a  waste- 
ful method."     Explain  this  statement. 

12.  Does  it  seem  to  you  that  the  preceding  statement  is  justifiable? 
Is  it  possible  that  "oil  pools"  should  be  handled  as  a  "natural  monop- 
oly" comparable  to  the  way  in  which  pubhc  service  utilities  are 
handled  in  cities? 

13.  Make  a  list  of  some  of  the  technical  improvements  which  might 
result  in  less  loss  of  coal ;  of  oil.  Would  these  technical  improvements 
be  desirable  whether  or  not  we  continue  to  mine  coal  and  oil  com- 
petitively ? 

14.  "  The  less  coal  we  use,  the  more  we  conserve.  The  more  water 
we  use,  the  more  we  conserve."    Explain  this  statement. 

15.  Does  it  strike  you  as  depressing  or  cheering  that  there  is  so  vast 
a  supply  of  water  power  unused  in  the  United  States?    Explain  why. 

16.  If  our  coal  and  oil  supply  is  exhausted,  is  it  possible  that  we 
might  build  a  civilization  on  the  basis  of  water  power?  If  so,  is  it 
quite  likely  that  in  such  a  civilization  people  would  receive  less  goods 
than  they  do  at  present  for  the  same  amount  of  effort  ? 

17.  It  is  proposed  to  build  a  government  hydro-electric  plant  at 
X.  It  has  been  pointed  out  that  the  sale  of  power  from  this  plant  can- 
not pay  the  market  rate  of  interest  on  the  cost  plus  operating  expenses 
for  at  least  twenty  years.    Do  you  think  the  plant  should  be  built? 

18.  If  we  cease  to  use  the  market  test  regarding  the  use  of  our  re- 
sources, what  test  shall  we  use  and  how  shall  we  apply  it  ? 

19.  Suppose  you  are  interested  in  building  a  hydro-electric  plant 
at  Millvillc.    You  know  that  the  success  of  your  plant  depends  on  a 


446  OUR  ECONOMIC   ORGANIZATION 

uniform  flow  of  water  and  that  this  in  turn  depends  considerably  on 
the  continuation  of  forest  growth  over  thousands  of  acres  of  land. 
Can  you  calculate  closely  the  risks  involved  in  building  your  plant? 
Can  you  control  carefully  the  factors  which  would  make  your  enter- 
prise a  risky  one  ? 

20.  Would  the  engineering  problem  involved  in  conservation  remain 
even  if  all  water  resources  were  developed  and  controlled  by  govern- 
ment? 

21.  Take  the  list  of  factors  determining  steadiness  of  stream  flow 
which  are  given  on  page  433  and  show  how  each  of  them  affects  the 
flow  of  streams. 

22.  Take  the  same  list  and  indicate  over  how  many  of  them  we  may 
hope  to  exercise  a  considerable  degree  of  control. 

23.  Suppose  that  you  owned  a  tract  of  forest.  What  risks  would 
impel  you  to  get  the  wood  on  the  market?  Would  other  forest  owners 
be  influenced  by  the  same  risks? 

24.  Explain  how  forestry  is  related  to  water  power  resources. 

25.  Explain  the  relation  of  forest  use  to  the  problem  of  irrigation. 

26.  Look  up  the  Reclamation  Service  and  be  prepared  to  report  to 
the  class  on  its  organization  and  work. 

27.  Does  it  seem  to  you  that  it  will  ever  be  possible  to  utilize  com- 
pletely those  resources  which  we  use  in  attempting  to  satisfy  our  wants  ? 
Will  there  always  be  some  loss  ? 

28.  Explain  what  is  meant  by  saying  that  the  lavish  use  of  our 
resources  is  one  basis  of  "the  American  standard  of  living." 

29.  Suppose  you  wish  to  make  a  rough  table  five  feet  long,  three 
feet  wide,  and  thirty  inches  high.  You  have  as  material  for  the  legs, 
one  2X4  twelve  feet  long,  you  also  have  two  boards  ten  inches  wide 
and  twelve  feet  long.  What  proportion  of  your  material  will  you  lose 
in  manufacturing?  Can  lumbermen  or  factory  manufacturers  work 
without  loss  of  material  ? 

30.  What  are  leguminous  crops?  Is  there  an  agricultural  college 
in  your  state?  If  so,  get  some  information  concerning  its  work.  Do 
the  same  for  agricultural  experiment  stations  in  your  state.  Is  there 
a  "county  farmer"  agent  in  your  county?    If  so,  what  arc  his  duties? 

31.  Make  an  outHne  of  the  main  points  in  the  lesson. 


WISE   UTILIZATION   OF  NATURAL   RESOURCES    447 

References  for  Further  Study 

Annual  Reports  and  Bulletins  of  the  Forest  Service. 

Newell,  Water  Resources,  Present  and  Future  Uses,  Yale  University 
Press. 

Ise,  The  United  States  Forest  Policy,  Yale  University  Press. 

McCulloch,  Water  Conservation,  Yale  University  Press. 

Dana,  What  the  National  Forests  Mean  to  the  Water  User. 

Steinmetz,  America's  Energy  Suyphj,  Transactions  of  the  American 
Institute  of  Electrical  Engineers,  December,  1918,  Volume  37,  Part  II, 
p.  985. 


STUDY  XXIV 
THE   WISE   UTILIZATION    OF    HUMAN    RESOURCES 

PURPOSES  OF  THIS  STUDY: 

1 .  To  examine  some  of  the  more  important  ways  in  which  our  supply 

of  human  resources  is  lost  and  wasted. 

2.  To  observe  some  of  the  many  agencies  that  are  coming  into  use  to 

lessen  these  losses  and  wastes. 

Important  as  it  is  that  we  should  iitiHze  wisely  our  natural 
resources,  it  is  even  more  important  that  we  should  conserve  our 
human  resources.  When  wars  are  being  waged,  we  hear  much 
of  man-power.  The  whole  country  organizes  so  as  to  utilize 
to  the  best  advantage  its  labor  power,  its  professional  men,  its 
business  men  —  all  its  human  resources.  The  soldiers  are 
carefully  selected  and  are  trained  for  months  to  make  them 
efficient  fighters.  Both  their  health  and  their  spirit  are  care- 
fully cultivated.  The  person  who  is  unwilling  to  do  his  share, 
whether  as  soldier  or  as  civilian,  is  regarded  as  a  "  slacker," 
and  he  who  is  unable  to  share  in  the  common  effort  is  an  object 
of  pity.  In  times  of  peace,  however,  we  do  not  so  thoroughly 
appreciate  the  value  of  our  human  resources.  Apparently  we 
have  not  yet  caught  the  full  significance  of  the  fact  that  man 
engages  in  active  adaptation  (see  Study  I)  in  his  effort  to  gratify 
wants,  and  that  in  consequence  wise  utilization  of  his  powers  is 
of  great  importance.  If  we  had  caught  the  full  significance 
of  this  fact,  it  is  hard  to  believe  that  our  human  resources  would 
be  used  so  wastofully. 

Men  go  to  waste  in  many  ways.  —  It  is  not  easy  to  make  a 
simple  statement  that  will  cover  even  approximately  the  various 
forms  of  waste.  Human  activities  are  multitudinous,  very 
complex,  and  not  easy  to  evaluate.     The  following  diagram 

448 


WISE   UTILIZATION   OF   HUMAN    RESOURCES      449 


will  serve  to  sketch  some  of  the  more  obvious  kinds  of  the  wastes 
of  our  human  resources. 


Men  who  go 
to  waste 


The  Idle 


c  -       1      X     -1     f  The  Sick  and  Injured 
Involuntarily  J  ^^^  Unemployed 

I  Voluntarily         (The  Leisure  class) 


The  Ineffectively 
Occupied 


Because  of  lack  of  training 

Because  of  lack  of  opportunity 

Because  of  lack  of  personal  initiative  and  in- 
centive 

Because  of  weakened  physical  and  mental 
power 

Because  of  poor  organization  and  direction  of 
effort 


The  Harmfully 
Occupied 


f  Wasting  their  own 
energy 


Wasting  the  energy  of 
other  people 


j  In  vice 

\^  In  dissipation 

'  By  crime 
By  fraud 
By  luxury 
By  false  teaching 
By  bad  direction  of 
social  energy 


Some  Forms  of  Human  Waste 


There  is  no  way  of  estimating  with  any  accuracy  what  these 
wastes  cost  society.  For  only  a  few  of  them  have  we  ever  made 
even  the  roughest  computations.  We  cannot  even  guess,  for 
example,  how  much  society  loses  because  of  inadequate  training 
of  its  members  (notice  again  the  statements  made  on  p.  330 
concerning  the  training  of  its  enterprisers) ;  because  of  vice  and 
dissipation ;  because  of  crime,  fraud,  and  false  teaching ;  be- 
cause of  poor  organization  and  direction  of  effort ;  because  of 
lack  of  opportunity  to  develop  one's  full  powers ;  or  because  of 
voluntary  idleness.  We  simply  know  that  these  losses  are  so 
enormous  that,  taken  in  connection  with  such  losses  as  are  de- 
scribed below,  it  may  well  l^e  that  we  are  not  utilizing  effectively 
more  than  20  per  cent  of  our  human  resources.  Some  persons 
have  put  the  figure  as  low  as  3  per  cent.  No  figures  are  very 
trustworthy  on  such  a  matter. 

•  This  diagram  is  a  modification  of  that  of  Carver  in  his  Principles  of  Political  Economy, 
p.  01.  If  is  realized  that  in  pari  this  diagram  shows  a  presumption  in  favor  of  producing 
goods  for  others  rather  than  self. 


450  OUR   ECONOMIC   ORGANIZATION 

Human  resources  are  wasted  through  idleness.  —  Down- 
right idleness,  whether  voluntary  or  involuntary,  is  a  great 
source  of  waste.  There  are  the  vagrants  and  the  idle  rich 
who  will  not  work ;  those  handicapped  through  sickness  and 
injury  who  cannot  work ;  the  unemployed  who  are  tempor- 
arily out  of  work  because  of  some  fluctuation  in  our  industrial 
structure. 

An  illustration  of  what  society  may  lose  through  the  idleness 
of  its  capable  members  is  well  set  forth  by  Carver.^ 

"Let  us  consider  the  case  of  a  great  surgeon.  The  author  has  such 
a  man  in  mind.  He  is  so  skillful  and  so  capable  that  his  services  are 
sought  by  large  numbers  of  people.  He  could  have  retired  years  ago 
and  lived  in  elegant  leisure  on  his  accumulated  wealth.  Had  he  chosen 
to  do  so,  some  hundreds  of  people  would  have  been  deprived  of  the 
benefit  of  his  skill.  Had  he  been  a  man  of  mediocre  ability,  it  would 
not  have  mattered  much;  but  a  man  of  mediocre  ability  could  not 
have  accumulated  enough  to  be  able  to  stop  working.  The  fact  that 
this  brilliant  surgeon  is  so  much  needed  is  the  very  thing  which  would 
have  made  it  possible,  if  he  had  been  a  man  of  perverted  morals,  to 
stop  working;  but  that  is  the  very  reason  why  he  should  not  stop. 
There  seems  to  be  no  solution  of  the  problem,  except  sound  moral 
standards  which  will  keep  such  men  busy.  If  they  lack  sound  moral 
standards,  even  compulsion  would  not  call  forth  their  best  efforts. 
That  which  has  been  said  of  our  great  surgeon  may  be  repeated  of 
any  great  man  in  any  useful  occupation." 

Preventable  accidents,  illnesses,  and  deaths  cause  great 
wastes.  —  Some  interesting  computations  have  been  made  con- 
cerning the  annual  cost  to  society  of  preventable  illnesses  and 
deaths.2  "  It  has  been  estimated  that  it  is  possible  to  prolong 
life  15  years.  This  is  equivalent  to  reducing  the  death  rate  by 
about  one  fourth  and  this  estimate  is  but  a  minimum.  ...  In 
the  United  States  alone,  as  regards  tuberculosis,  the  gross  loss 
of  earnings  by  illness  and  of  potential  earnings  cut  off  by  death, 
together  with  the  expenses  of  illness,   etc.   amount  to  over 

'  Carver,  Principles  of  Political  Economij,  pp.  71-72. 

'  Irving  Fisher,  National  Vitality,  Iln  Wastes  and  Conservation,  ia  Report  of  the  National 
ConaervatioD  Commission  (1009),  Bui.  30. 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      451 

$1,000,000,000  per  annum.^  Dr.  G.  M.  Kober  thinks  it  con- 
servative to  say  that  the  annual  cost  of  typhoid  is  $350,000,000 
and  Dr.  L.  O.  Howard  believes  that  malaria  alone  costs  the 
country  $100,000,000  annually,  and  the  insect  diseases  generally 
$200,000,000.  .  .  .  Unfortunately  there  are  no  exact  statistics 
of  preventability.  We  feel  safe,  however,  in  concluding  that 
at  least  half  a  billion  could  be  saved  from  the  present  cost  of 
illness.  This,  added  to  the  loss  by  preventable  deaths  of  poten- 
tial earnings  of  a  billion  gives  at  least  a  billion  and  a  half  of  pre- 
ventable waste.  This  does  not  include  the  losses  from  ineffi- 
cient work  due  to  drunkenness  or  other  vicious  habits ;  nor 
does  it  include  the  cost  of  '  undue  fatigue  '  which  we  have  some 
reason  to  believe  exceeds  in  its  effect  on  efficiency  the  loss  from 
illness.  The  actual  economic  saving  annually  possible  in  this 
country  by  preventing  needless  deaths,  needless  illness,  and 
needless  fatigue  (serious  and  minor),  is  certainly  far  greater  than 
one  and  a  half  billions  and  may  be  three  or  four  times  as  great." 
In  this  connection  we  must  not  overlook  the  accidents  attend- 
ant upon  modern  industry.  One  of  our  methods  of  produc- 
tion is  that  of  machine  industry.  Modern  technology  has  har- 
nessed the  forces  of  nature  and  these  forces  are  so  resistless 
that  when  they  escape  control,  their  power  of  destruction  is  very 
great.  The  great  machines  that  are  driven  by  these  forces  in 
modern  factories  are  so  complicated  that  the  worker  cannot 
comprehend  and  understand  them  and  control  them  as  he  did 
the  simple  tools  of  other  days.  This  lack  of  understanding 
leads  to  accidents.  Almost  all  machines  are  used  interdepend- 
ently.  One  is  operated  by  another.  A  fellow  workman  starts 
an  engine  in  another  building  and  a  machinist's  hand  is  crushed 
in  the  machine  he  is  cleaning.  A  fellow  miner  is  careless  with 
dynamite  and  a  dozen  men  are  killed.  An  inspector  in  a  steel 
mill  is  ignorant,  passes  a  defective  steel  beam,  and  a  score  of 
workers  using  this  beam  in  bridge  construction  are  precipitated 
into  a  swollen  river. 

'  Note  that  all  computations  in  this  discussion  are  at  the  relatively  low-price  levels  of, 
say,  1908. 


452  OUR  ECONOMIC   ORGANIZATION 

These  considerations  are  so  serious  that,  so  it  is  estimated/ 
in  1913  there  were  more  than  25,000  fatal  industrial  accidents 
among  American  wage  earners  and  some  700,000  injuries  in- 
volving a  disability  of  a  month  or  more.  This  loss  from  acci- 
dents involves  not  merely  the  loss  of  labor  power  but  also  the 
cost  which  comes  to  the  community  in  caring  for  the  injured 
or  dead.  And  there  are  often  still  other  serious  results.  For 
instance,  if  a  coal  miner  is  killed,  his  family  is  frequently  left 
destitute ;  the  children  cannot  afford  to  attend  school ;  they 
grow  up  ignorant,  unable  to  earn  a  good  living  and  may  even 
be  led  into  habits  of  vice  and  crime  which  bring  to  society  a 
further  loss  and  waste. 

Unemployment  a  source  of  waste.  —  Those  who  are  tempo- 
rarily out  of  work  because  of  some  fluctuation  in  our  industrial 
structure  constitute  a  great  waste  of  our  human  resources.  There 
are  many  such  fluctuations.  Even  when  industry  as  a  whole  is 
growing,  certain  fields  are  waning,  and  the  persons,  both  enter- 
prisers and  workers  who  are  in  these  fields,  must  seek  different 
openings  —  generally  with  an  attendant  period  of  unemploy- 
ment. Then,  too,  changes  in  processes  and  in  technique,  and 
changes  in  the  location  of  industries  are  continually  taking  place 
and  all  such  changes  are  likely  to  mean  unemployment.  In 
general,  the  risks  which  must  be  met  by  our  enterprisers  (see 
Study  XXI)  are  also  risks  for  our  workers.  A  burning  factory, 
a  crop-destroying  storm,  a  bank  robbery,  or  a  forest  fire  may 
each  spell  unemployment  and  hard  times  for  the  worker.  What- 
ever tends  to  make  capital  unemployed  tends  to  put  the  worker 
out  of  employment. 

Worthy  of  particular  mention  are  the  so-called  seasonal  and 
cyclical  fluctuations  in  industry.  When  a  seasonal  business  be- 
comes less  active  at  the  close  of  the  season,  men  and  women  are 
out  of  work  as  a  result.  In  the  canning  industry,  government 
documents  report  that  about  150,000  persons  are  employed 
during  September.     In  January  only  about  20,000  are  so  em- 

'  F.  L.  Uoffman,  Industrial  Accident  Statistics  in  Bulletin  of  the  United  States  Bureau  of 
Labor  Statistics,  No.  157. 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      453 

ployed.  In  the  lumbering  industry,  which  flourishes  during 
the  winter,  great  numbers  of  workers  become  unemployed  with 
the  melting  of  the  snow.  Hundreds  of  men  "  go  west  "  in  the 
summer  to  work  in  the  harvest  fields  and  return  to  the  cities, 
out  of  employment,  when  the  wheat  of  Kansas,  the  Dakotas, 
and  Minnesota  has  been  harvested.  Similarly  the  building  in- 
dustries, truck  gardening,  and  coal  mining,  being  seasonal 
occupations,  first  employ  and  then  release,  to  make  new  ad- 
justments, thousands  of  employees  each  year. 

The  expression  "cychcal  fluctuations"  has  reference  to 
those  alternating  periods  of  "good  times"  and  "bad  times" 
which  have  been  so  characteristic  of  our  modern  economic 
organization.  The  "bad  times"  are  times  of  very  serious  dis- 
ruption of  industrial  activity  and  accordingly  times  of  very 
serious  unemployment. 

Even  in  so-called  "  normal  "  times,  there  is  a  very  consider- 
able unemployment.  If  we  go  back  to  the  period  of  relatively 
stable  conditions  prior  to  the  Great  War,  we  find  that  a  commis- 
sion reporting  in  1911  on  New  York  conditions  estimated  that 
"  in  ordinary  years  of  business  prosperity,  out  of  every  100  per- 
sons in  industry  60  will  be  steadily  employed ;  40  will  be  work- 
ing irregularly.  On  any  given  day  during  the  year  at  least 
3  per  cent  of  our  wage  earners  are  involuntarily  idle.  Usually 
there  are  10  per  cent."  ^  This,  in  itself,  is  a  great  waste,  but 
there  must  be  added  the  wastes  coming  from  the  facts  that  often 
the  unemployed  person  loses  efficiency  during  the  period  of 
unemplojrment  and  that  the  lessened  income  may  have  for  the 
family  concerned  effects  similar  to  those  sketched  on  the 
opposite  page  for  industrial  accidents. 

Our  powers  are  ineffectively  utilized.  —  The  cases  shown 
on  p.  449  in  which  men  go  to  waste  through  being  in- 
effectively occupied  or  harmfully  occupied  are  probably  self- 
explanatory  with  the  possible  exception  of  those  who  are 
ineffectively  employed  because  of  lack  of  personal   initiative 

*  Adapted  from  New  York  State  Commission  on  Employers'  Liability  and  Unemploy- 
ment, Report  of  Committee  on  Unemployment  in  the  State  of  New  York,  p.  38. 


454  OUR  ECONOMIC   ORGANIZATION 

and  incentive.  After  all  proper  allowance  has  been  made 
for  the  fact  that  there  is  waste  due  to  overfatigue,  it  still 
remains  true  that  there  is  much  waste  due  to  our  making  a 
beggarly  use  of  our  latent  powers.  Generally  this  is  due  to 
lack  of  incentive,  —  either  to  a  lack  of  constructive  imagination 
and  initiative  on  our  own  part  or  to  the  lack  of  an  appropriate 
incentive  (whether  wage,  or  praise,  or  promotion,  or  something 
else)  being  supplied  by  our  "  superior  officers."  Herein  lies 
a  fruitful  field  for  the  cultivation  of  "  will  to  do  "  on  the  part 
of  each  of  us  and  another  fruitful  field  for  our  enterprisers  to 
cultivate  in  dealing  with  their  workei-s. 

One  of  our  psychologists  writes  as  follows  :^"  Actual  in- 
stances prove  that  great  increases  of  work  and  results  can  be 
secured  by  outside  stimulus  and  by  conscious  effort. 

"If  there  is  one  place  where  the  limit  of  exertion  can  be  counted 
upon,  it  is  in  an  inter-collegiate  athletic  contest.  While  taking  part 
in  football  games,  I  frequently  observed  that  my  team  would  be  able 
to  push  the  opposing  team  halfway  across  the  field.  Then  the  tables 
would  be  turned  and  my  team  would  give  ground.  At  one  moment 
one  team  would  seem  to  possess  much  superior  physical  strength  to  the 
other ;  the  next  moment  the  equilibrium  would  be  changed  apparently 
without  cause.  Often,  however,  the  weaker  team  would  rally  in 
response  to  the  captain's  coaching.  On  the  field  a  player  frequently 
finds  himself  unable  to  exert  himself.  His  greatest  effort  is  necessary 
to  force  himself  to  work.  In  such  a  mental  condition  a  vigorous  and 
enthusiastic  appeal  from  the  coach  may  supply  the  needed  stimulus 
and  stir  him  to  sudden  display  of  all  his  strength." 

"Many  men  have  never  discovered  their  reserve  stores  of  strength 
because  they  have  formed  the  fixed  habit  of  quitting  at  the  first  access 
of  weariness. 

"Our  best  energies  are  not  on  the  surface  and  are  not  available 
without  great  exertion.  We  have  to  warm  up  and  get  our  second  wind 
before  we  are  capable  of  our  best  physical  or  mental  accomplishments. 
All  our  muscular  and  psychical  processes  are  dependent  upon  the 
activity  of  the  nervous  system.    This  activity  seems  to  be  at  its  best 

■  Walter  Dill  Scott,  Increasing  Human  Efficiency  in  Business,  pp.  9-15. 


WISE   UTILIZATION   OF  HUMAN   RESOURCES      455 

only  after  repeated  and  vigorous  stimulation  and  after  it  has  reached 
down  to  profound  and  widely  distributed  centers. 

"When  an  individual  succeeds  in  tapping  his  reserve  energies,  others 
marvel  at  the  tremendous  tasks  he  accompHshes.  They  judge  in 
terms  of  superficial  energy,  and  for  such  the  results  would,  of  course, 
be  impossible,  even  though  many  of  the  admiring  spectators  could 
actually  equal  or  excel  the  deed." 

"The  steel  blade  that  is  used  seems  to  last  as  long  as  the  one  which  is 
allowed  to  lie  idle.  The  wearing  out  in  the  one  case  does  not  seem  to  be 
more  destructive  than  the  rusting  out  in  the  other. 

"  We  have  a  choice  between  wearing  out  and  rusting  out.  Most  of 
us  unwittingly  have  chosen  the  rusting  process." 

Wastes  are  particularly  significant  among  the  workers.  — 
Quite  clearly,  the  wastes  of  our  human  resources  are  not  con- 
fined to  a  single  class  in  the  community.  They  are  applied 
generally.  It  so  happens,  however,  that  they  are  particularly 
Bignificant  in  the  case  of  that  class  or  group  we  call  the 
workers,  partly  because  they  form  the  bulk  of  our  society, 
partly  because  many  wastes  act  with  particular  virulence  in 
that  group.  This  is  particularly  true  of  accidents,  unemploy- 
ment, and  even  disease. 

The  very  position  of  the  worker  in  our  society  is  such  that 
we  must  watch  our  adjustments  carefully  if  waste  is  to  be 
avoided.  He  is  no  longer  in  the  position  of  the  independent 
craftsman  (see  Study  IV)  who  owned  the  raw  materials  on  which 
he  worked  ;  owned  the  tools  with  which  he  worked  ;  owned  the 
products  he  made ;  and  fixed  for  himself  the  circumstances  and 
conditions  of  his  labor.  He  is  not  even  in  the  position  of  the 
apprentice  of  former  days,  for  the  whole  organization  of  business 
of  that  day  was  calculated  to  pass  the  worker  through  the  period 
of  apprenticeship  and  make  him  an  independent  master  crafts- 
man, controlling,  very  largely,  the  conditions  which  surrounded 
him. 

In  our  study  of  the  rise  of  machine  industry  we  learned 
how  aU  of  this  changed  with  the  incoming  of  the  modern  period. 
The  discovery  of  America  and  other  new  lands,  the  improve- 


456  OUR  ECONOMIC   ORGANIZATION 

ment  of  ships,  the  invention  of  the  compass,  the  invention  of 
the  astrolabe,  the  incoming  of  other  inventions  which  widened 
the  market,  placed  buyers  and  sellers  hundreds  or  even  thou- 
sands of  miles  apart.  Thus,  it  became  impossible  for  the  or- 
dinary craftsman  to  know  enough  about  market  conditions  to 
sell  his  goods  to  the  best  advantage.  We  have  learned  how 
functional  specialists  began  increasingly  to  perform  the  tasks 
which  the  craftsman  had,  in  the  small  market,  performed  for 
himself.  In  our  study  of  the  clothier  (see  p.  81)  we  saw  the 
average  worker  put  into  a  more  "  dependent  "  position  than  he 
had  been  before,  while  the  clothier  who  owned  the  raw  material 
and  knew  where  to  sell  the  goods,  controlled,  in  large  measure, 
the  efforts  of  the  workers.  Finally  with  the  invention  of  the  great 
labor-saving  machines,  the  factory  system  was  ushered  in.  As 
machine  manufacture  took  the  place  of  tool  work,  the  simple 
artisan  had  no  choice  but  to  work  for  those  who  could  buy  the 
new  machinery  and  build  the  huge  factories  required  to  house 
it.  Thus  the  artisan  became  a  wage  worker,  dependent  upon 
some  one  else  for  employment. 

Once  we  see  that  the  worker  is  dependent  upon  employment, 
it  is  easy  to  see  that  he  can  fare  well  only  when  capital  is  busy. 
When  factories,  railroads,  and  machines  are  working  busily  there 
are  jobs  for  workers,  but  when  capital  is  idle  the  worker  is  in 
trouble.  For  our  present  purposes,  the  significant  thing  is 
that  he  is  in  most  cases  not  responsible  for  the  trouble  nor 
can  he  do  a  great  deal  to  remove  its  causes.  It  is  hard  to  be- 
lieve that  a  man  enmeshed  in  such  a  net  of  impersonal  factors 
which  he  can  affect  but  little  will  retain  his  full  sense  of  initia- 
tive and  "  will  to  do."  The  situation  must  be  carefully  safe- 
guarded or  effective  incentive  will  be  lacking.  Our  managers 
of  industry  have  not  yet  fully  sensed  this  situation.  Only  the 
more  progressive  have  seen  that  "  wage  "  is  a  weak  incentive, 
and  that  it  must  be  supplemented  by  pride  in  work,  conscious- 
ness of  achievement,  sense  of  responsibility,  sense  of  growth, 
loyalty  to  leadership,  and  all  those  other  intangibles  that  make 
a  man  feel  like  a  man  who  lives  rather  than  one  who  exists. 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      457 

But  the  situation  of  many  of  our  workers  is  not  merely  one 
in  which  incentive  may  become  weak.  It  is  also  one  from  which 
there  may  in  too  many  cases  result  weakened  mental  and  physi- 
cal power  (see  diagram,  p.  449)  due  to  economic  insufficiency. 
A  well-known  economist,  writing  of  conditions  as  they  were 


Broicn  Brolfurs 


The  New  York  Bread  Line 


Scenes  of  men  seeking  the  aid  of  charity  become  common  in  periods  of 
extended  unemployment- 


prior  to  the  Great  War,  presents  startling  evidence  of  human 
waste  due  to  economic  insufficiency.^ 

"  It  is  poverty  in  the  sense  of  economic  insufficiency  —  its  wide  ex- 
tent, its  assumed  necessity,  its  tragic  consequence  —  that  forms  the 
real  problem.  There  are  great  bodies  of  people  in  country  and  in 
city  who  from  birth  have  less  than  enough  food,  clothing,  and  shelter ; 
who  from  childhood  must  toil  long  and  hard  to  secure  even  that  in- 
sufficient amount ;  who  can  benefit  little  from  the  world's  advance  in 
material  comfort  and  in  spiritual  beauty  because  their  bodies  are 

'J.  H.  Hollander,  The  Abolition  of  Poverty,  pp.  1-8. 


458  OUR   ECONOMIC   ORGANIZATION 

undernourished,  their  minds  overstrained,  and  their  souls  deadened 
by  bitter  struggle  with  want.  These  are  the  real  poor  of  every  com- 
munity —  the  masses  who,  not  lacking  in  industry  and  thrift,  are  yet 
never  really  able  to  earn  enough  for  decent  existence  and  who  toil  on 
in  constant  fear  that  bare  necessities  may  fail." 

"Appalling  in  its  own  misery,  this  mass  of  poverty  takes  on  even 
greater  significance  as  the  supply  source  of  pauperism.  Not  only  is 
the  interval  between  insufficiency  and  dependence  at  all  times  narrow, 
but  the  inability  to  provide  against  mishap  or  calamity,  indeed  the 
very  conditions  of  body  and  mind  which  grow  out  of  undernourish- 
ment and  overcrowding  make  fatally  easy  the  transition  from  self- 
support  to  dependence.  Poverty  has  thus  been  likened  to  a  treacher- 
ous footpath  encircling  the  hopeless  morass  of  pauperism.  Those  who 
tread  it  are  in  constant  danger,  even  with  the  exercise  of  care  and  fore- 
sight, of  falling  or  of  shpping  pr  of  being  crowded  off.  This  insecure 
foothold,  once  lost,  is  not  likely  again  to  be  regained ;  the  fallen  are 
added  to  the  wretched  of  body  or  chronically  dependent. 

"The  probable  amount  of  such  poverty  is  as  impressive  as  its  evident 
quality.  In  the  unfortunate  absence  of  any  direct  enumeration,  re- 
course must  be  had  to  reasonable  computation.  The  remarkable  study 
of  the  nature  and  extent  of  poverty  in  the  United  States  made  by 
Robert  Hunter  ten  years  ago,  and  still  the  only  serviceable  survey  of 
the  subject,  sets  forth  that,  in  the  industrial  commonwealths  of  the 
United  States,  probably  as  much  as  20  per  cent  of  the  total  population 
are  ordinarily  below  the  poverty  line.  If  one-half  of  this  estimate  be 
applied  to  other  commonwealths,  the  conclusion  is  that  in  fairly  pros- 
perous years  'no  less  than  10,000,000  persons  in  the  United  States  are 
in  poverty.'  In  this  computation  a  purely  physical  standard — 'a 
sanitary  dwelling  and  sufficient  food  and  clothing  to  keep  the  body  in 
working  order'  —  defines  the  poverty  line,  with  no  monetary  allow- 
ance for  intellectual,  aesthetic,  moral,  or  social  requirements." 

In  thinking  of  this  waste  we  must  bear  in  mind  that  its  evil 
effects  are  cumulative.  The  family  concerned  has  small  op- 
portunity to  give  its  younger  members  training  and  opportunity ; 
sickness  has  an  easier  fight  with  weakened  bodies ;  the  waste 
of  human  power  in  one  generation  is  likely  to  cause  an  even 
greater  waste  in  succeeding  generations. 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      459 

Waste  is  being  reduced  in  many  ways.  —  Any  one  who  comes 
in  contact  with  the  facts  concerning  unemployment,  injury, 
sickness,  and  economic  insufficiency  will  feel  depressed,  not  only 
by  the  sense  of  personal  suffering  which  is  endured,  but  by  the 
social  loss  which  is  constantly  occurring.  The  picture  has, 
however,  a  brighter  side.  Great  as  are  our  wastes,  it  is  hard 
to  believe  that  they  are  as  large  as  those  of  the  past.  As  for 
the  future,  we  are  certainly  working  on  the  problem,  and  with 
many  good  results. 

It  will  be  interesting  to  glance  at  a  few  of  the  structures  and 
institutions  which  are  concerned  with  the  prevention  of  the 
waste  of  human  resources.  In  working  through  the  very  in- 
complete list  which  follows  we  ought  to  be  alert  to  add  others 
and  to  check  the  list  back  with  the  diagram  on  p.  449. 

1.  There  should  be  mentioned  first  of  all  the  development 
of  knowledge  upon  the  character  of  the  problem  and  then  the 
development  of  sound  social  and  individual  attitudes  towards 
its  solution.  The  development  of  a  sound  moral  sense  upon 
such  matters  as  dissipation,  laziness,  trickery,  etc.,  will  probably 
be  more  effective  than  any  other  means  of  reducing  such  wastes. 

2.  In  the  prevention  of  unnecessary  accidents,  sickness,  and 
deaths  a  very  noteworthy  progress  has  occurred.  There  are 
factory  laws  and  inspection  laws  which  require  factory  owners 
to  protect  their  machinery  with  safety  devices,  to  have  proper 
ventilation,  lighting,  and  construction  of  their  buildings  for 
safety.  The  inspection  laws  usually  provide  that  inspectors 
paid  by  the  state  shall  visit  these  factories  to  ascertain  that  the 
laws  are  obeyed.  There  is  also  the  "safety  first "  movement  and 
the  National  Council  of  Safety  which  is  going  far  beyond  legal 
requirements  in  the  protection  of  human  resources.  The  mod- 
ern emphasis  upon  preventive  medicine  which  centers  its  thought 
upon  the  prevention  of  disease  is  a  highly  significant  movement, 
as  is  also  the  establishment  of  a  national  public  health  service 
and  state  and  municipal  boards  of  health.  Housing  regulations, 
medical  inspection  of  school  children,  the  increased  study  of 
personal  and  public  hygiene,  and  national  prohibition  are  but 


460  OUR   ECONOMIC   ORGANIZATION 

the  beginning  of  a  long  list  of  achievements  looking  toward 
human  conservation. 

3.  As  for  the  reduction  of  unemployment,  not  a  few  things 
are  being  accomphshed.  Every  device  which  we  considered 
in  Study  XXI  that  would  aid  in  lessening  capital  risks  is  an 
aid  in  reducing  unemployment  and  the  losses  which  it  involves. 
Market  news  through  trade  journals,  crop  reports,  consular 
service,  the  Bureau  of  Markets,  the  Board  of  Trade,  and  many 
other  channels  are  aids  in  steadying  industry,  in  keeping  capi- 
tal employed,  and  thus  in  assuring  employment  for  the  wage 
worker.  Insurance,  risk  lessening  contracts,  and  sprinkler  sys- 
tems must  all  be  regarded  as  lessening  the  risks  of  loss  through 
unemployment.  More  obviously  bearing  upon  the  problem, 
however,  are  such  matters  as  the  establishment  of  public  em- 
ployment offices  charged  with  bringing  together  the  workers 
seeking  employment  and  the  manager  seeking  workers;  the 
estabhshment  of  employment  departments  by  business  houses ; 
and  the  regulation  of  output  by  a  firm  so  as  to  avoid  extreme 
seasonal  fluctuations. 

Private  employment  agencies,  such  as  all  of  us  have  seen, 
are  of  aid  (sometimes  of  doubtful  aid)  in  marketing  labor  power. 
Newspapers  through  their  want  columns,  and  the  trade  papers 
of  workers  and  labor  unions,  such  as  the  Molders'  Journal, 
also  convey  information  which  helps  workers  in  selling  their 
ability  to  advantage.  All  of  these  agencies  aid  in  keeping  men 
employed  and  in  reducing  the  losses  which  come  from  un- 
employment. Much,  however,  needs  to  be  done  before  our 
social  loss  from  unemployment  will  cease  to  be  a  serious 
waste. 

4.  There  is  almost  no  end  to  the  list  of  agencies  devoted  to 
diminishing  the  number  of  the  ineffectively  employed.  There 
is  the  consumers'  league  which  urges  the  public  to  buy  only 
from  firms  that  make  goods  under  good  standards  of  the  use 
of  labor  power.  The  vocational  guidance  movement  looks 
toward  the  placement  of  persons  in  pursuits  in  which  they  will 
be  effective.     Insurance  devices  of  many  sorts,   both  public 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      461 

and  private,  have  come  in  to  help  tide  people  over  the  expenses 
connected  with  accidents,  sickness,  and  even  unemployment, 
and  thus  prevent  some  of  the  wastes  connected  with  economic 
insufficiency.  Directed  toward  the  same  goal  are  minimum 
wage  laws  which  have  been  passed  in  a  number  of  states  re- 
quiring that  no  worker  shall  be  paid  less  than  a  certain  sum 
of  money  per  week.  It  has  been  the  effort  of  the  framers 
of  the  minimum  wage  laws  to  make  the  wage  high  enough 
so  that  the  "  real  income "  of  the  worker  is  a  "  hving " 
income. 

5.  The  labor  unions,  also,  do  many  things  which  bear  help- 
fully upon  the  problem.  In  addition  to  their  so-called  collective 
bargaining  work,  many  of  them  promote  the  welfare  of  their 
members  in  other  ways,  such  as  the  payment  of  benefits  when 
their  members  are  sick,  out  of  work,  or  disabled  by  old  age. 
They  have  also  played  their  part  in  bringing  about  action  by 
society  as  a  whole.  They  have  influenced  legislation,  combated 
child  labor,  fought  excessive  hours,  and  striven  for  safeguards 
against  accident  and  for  proper  sanitation  in  factories.  It 
has  been  said  of  them  that  they  are  impersonal  devices  to  enable 
the  worker  to  cope  with  the  impersonal  situation  in  which  he 
finds  himself  in  our  modern  society. 

6.  Particular  mention  ought  to  be  made  of  a  new  factor  in  busi- 
ness management  which  is  being  increasingly  used.  More  and 
more  our  business  units,  and  especially  our  large  business  units, 
are  establishing  a  department  called  "personnel"  designed  to 
rank  with  sales,  finance,  and  production  as  a  major  part  of  the 
business  organization.  The  head  of  the  new  department,  vari- 
ously known  as  "  the  director  of  personnel,"  "  the  employment 
manager,"  or  "  the  manager  of  industrial  relations,"  is  charged 
with  the  duty  of  securing  and  maintaining  an  effective  working 
force.  He  seeks  to  get  the  right  man  ;  to  put  the  right  man  in 
the  right  place ;  to  secure  the  right  conditions  of  work  both  in 
terms  of  physical  surroundings  and  in  terms  of  the  development 
of  the  will  to  do ;  to  give  the  right  training  for  the  various  tasks ; 
to  develop  in  general  the  right  relations  between  the  plant  and 


462  OUR   ECONOMIC   ORGANIZATION 

the  men.  Business  houses  have  found  that  such  a  department 
is  very  profitable  because  it  results,  where  well  conducted,  in 
increased  output  at  lower  cost.  Society  is  interested  in  seeing 
such  departments  put  into  business  organizations  because  of 
the  saving  of  human  resources  which  results.  The  character 
of  these  savings  may  be  seen  from  the  accompanying  chart  of 
the  functions  of  an  employment  department.  Upon  exami- 
nation of  this  chart  you  will  find  that  the  personnel  manager  has 
to  do  with  many  forces  which  tend  to  lessen  the  waste  of  our 
human  resources. 

What  one  state  has  done  in  one  corner  of  the  field.  —  We  see 
clearly  enough  that  in  the  conservation  of  our  human  resources 
there  must  be  action  taken  by  individuals,  by  small  groups,  by 
larger  groups,  and  even  by  the  state.  We  see  also  that  the  issues 
are  larger  than  the  conservation  of  our  "  labor  power  "  in  the 
narrow  sense  of  the  term.  We  need  also  conservation  of  the 
human  resources  found  in  our  professional  men  and  in  our 
managers.  Keeping,  now,  the  broad  aspects  of  the  whole 
problem  before  you,  you  will  find  it  interesting  to  see  what  one 
state  did  in  one  and  one-half  decades  ^  in  one  'part  of  the  field, 
in  that  one  form  of  social  control  known  as  law. 

"1897.  Child  labor  law  enacted  covering  not  only  factories  but 
offices,  laundries,  mercantile  establishments,  and  stores,  and  fixing 
maximum  hours  of  labor  of  children  under  sixteen  years  of  age  at  ten 
per  day  and  sixty  per  week. 

"  1897.  Act  passed  requiring  the  installation  of  blowers  to  remove 
dust  from  metal  polishing,  buffing,  and  grinding  wheels. 

"1901.  Child  labor  law  strengthened  and  all  establishments 
required  to  provide  suitable  seats  for  women  and  girls. 

"  1903.     Present  child  labor  law  enacted. 

"1907.  Factory  Inspection  Department  established  as  separate 
department  of  the  state  government  and  its  powers  extended. 

"  1907.  Present  law  providing  for  health,  safety,  and  comfort  of 
workers  in  factories,  mercantile  establishments,  mills,  and  workshops 
enacted. 

'  From  Industrial  Conditions  in  Springfield,  Illinois,  pp.  141-143.  (Russell  Sage 
Foundation,  I'JIO.) 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      463 


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464  OUR  ECONOMIC   ORGANIZATION 

"  1907.  Act  passed  to  provide  for  the  safety  of  persons  engaged  in 
construction,  alteration,  or  repair  of  buildings,  bridges,  viaducts,  and 
other  structures. 

"  1908.  Act  passed  preventing  employment  in  coal  mines  of  persons 
who  have  not  been  passed  by  a  State  Miners'  Examining  Board. 

"1909.  Law  enacted  fixing  hours  of  work  of  women  in  factories 
and  laundries  at  ten  per  day. 

"1910.  Act  passed  providing  for  fire-fighting  equipment  in  coal 
mines.     Later  amended  and  strengthened. 

"1911.  Women's  ten-hour  law  extended  to  cover  mercantile  estab- 
lishments, hotels,  restaurants,  offices,  and  other  enumerated  places. 

"  1911.     Law  enacted  to  protect  workers  from  occupational  diseases. 

"  1913.  Act  passed  consoHdating  and  strengthening  laws  to  provide 
for  safety  and  welfare  of  workers  in  coal  mines. 

"  1913.    Present  workingmen's  compensation  law  enacted." 

PROBLEMS 

1.  What  is  meant  by  saying  labor  power  is  part  of  our  store  of 
social  energy  ? 

2.  Is  waste  of  labor  power  involved  in  (a)  the  care  of  the  sick; 
(6)  the  care  of  persons  too  young  to  work ;  (c)  the  care  of  persons  too 
old  to  work;  (d)  compulsory  school  attendance;  (e)  premature 
death;    (/)  debauchery? 

3.  If,  as  a  result  of  laziness,  lack  of  education,  or  lack  of  opportu- 
nity, a  capable  man  is  working  in  a  trade  for  which  he  is  not  suited,  are 
you  and  I  affected  by  that  fact  ?    Explain  your  answer. 

4.  What  judgment,  considering  the  matter  from  the  point  of  view 
of  production,  is  to  be  passed  on  an  idle  rich  man  ?  Is  it  upon  the  whole 
fortunate  or  unfortunate  that  there  are  such  people  in  society? 

5.  Who  looks  after  the  health  and  strength  of  people?  Do 
parents?  Do  factory  owners?  Do  school  authorities?  Do  city 
authorities?  Do  others?  If  these  persons  do  look  after  the  health 
and  strength  of  people,  why  do  they  ? 

6.  Have  amusements  any  relation  to  individual  efficiency? 
Have  public  parks?    Bathing  beaches?    Churches? 

7.  Look  in  the  general  histories  and  find  out  about  the  great 
plagues  which  used  to  spread  through  Europe  and  Asia.  Why  were 
these  plagues  more  common  in  earlier  days  than  now? 


WISE   UTILIZATION   OF   HUMAN   RESOURCES      465 

8.  One  of  the  great  discoveries  of  modern  times  is  a  whole  series 
of  disinfectants.    Find  out  about  some  of  them. 

9.  Find  out  about  the  health  authorities  in  your  town.  What 
are  their  duties  ?  In  what  ways  does  your  school  give  special  attention 
to  matters  of  health? 

10.  Can  it  be  possible  that  certain  localities  in  the  Orient  are  a 
menace  to  us?  Is  American  public  health  work  in  other  countries 
justified  in  any  measure  by  the  advantage  which  we  ourselves  gain 
from  this  work? 

11.  "Laws  are  sometimes  necessary  in  order  to  protect  us  against 
our  own  ignorance."     Show  how  this  is  illustrated  by  health  laws. 

12.  "  Relaxation  is  more  difficult  to  secure  in  a  modern  community 
than  it  was  in  earlier  days  when  people  lived  in  the  country."  Is  this 
statement  true  ? 

13.  Among  the  amusements  provided  in  your  town  can  you  describe 
some  which  do  not  help  the  health  of  the  community  ? 

14.  Name  as  many  occupations  as  you  can  which  are  very  danger- 
ous. Name  as  many  occupations  as  you  can  in  which  there  is  very 
little  danger. 

15.  Give  as  many  instances  as  you  can  of  cases  where  employers 
can  by  proper  action  lessen  the  amount  of  sickness  among  their 
workers. 

16.  Give  as  many  instances  as  you  can  of  cases  where  the  govern- 
ment can  by  proper  action  lessen  the  amount  of  sickness  among  the 
workers. 

17.  Give  as  many  instances  as  you  can  of  cases  where  the  worker 
himself  can  by  proper  action  lessen  the  amount  of  sickness  he  expe- 
riences. 

18.  Show  why  long  hours  and  fatigue  increase  the  dangers  of  in- 
dustrial accident.  Do  they  increase  the  dangers  of  occupational 
diseases? 

19.  What  difference  does  it  make  to  you  or  me  whether  we  have 
"safety  first"  for  human  resources? 

^  20.  In  every  factory  a  certain  number  of  machines  break  and  wear 
out  each  year.  The  manufacturer  counts  such  loss  among  his  costs, 
and  tries  to  raise  his  selling  price  accordingly.     Is  this  fair? 


466  OUR  ECONOMIC   ORGANIZATION 

21.  In  every  factory  a  certain  number  of  workmen  are  injured  and 
killed  each  year.  If  the  factory  owner  pays  or  compensates  these 
injured  workmen,  or  their  families,  is  it  fair  to  add  these  expenses  to  the 
selling  prices  of  his  goods  ? 

22.  Is  it  merely  machine  industry  which  is  dangerous  ?  Is  chemical 
industry  dangerous?  If  it  is,  can  you  name  any  specific  dangers  of 
chemical  industries? 

23.  What  are  the  causes  of  unemployment?  What  is  meant  by 
saying  its  consequences  are  cumulative? 

24.  Because  of  a  strike  3000  workers  are  idle.  Is  this  a  case  of 
unemployment?  Is  it  a  case  of  a  waste  of  human  resources?  If  it  is, 
is  there  any  defense  for  a  strike  ? 

25.  Several  states  have  set  up  employment  bureaus.  How  do  such 
organizations  fit  in  with  the  problems  raised  in  this  lesson  ? 

26.  Suppose  your  father  should  become  unemployed ;  find  out  what 
effect  this  would  be  likely  to  have  upon  him ;  upon  you. 

27.  What  is  meant  by  calling  unemployment  a  "waste  of  human 
resources"? 

28.  We  hear  much  of  vocational  guidance.  What  bearing  has 
vocational  guidance  on  the  matters  raised  in  this  lesson  ? 

29.  If  all  children  over  10  years  of  age  were  put  to  work  at  once, 
would  the  labor  power  of  the  country  be  greater?  Do  you  think  it 
would  be  greater  15  years  from  now  than  it  otherwise  would  have 
been  ?    Fifty  years  from  now  ? 

30.  Does  it  not  seem  hard-hearted  to  enforce  a  law  that  a  child  must 
go  to  school  when  the  family  needs  very  badly  the  money  the  child 
could  earn  at  work  ? 

31.  It  is  still  a  rule  of  law  in  some  states  that  a  worker  who  is 
injured  cannot  recover  damages  at  law  if  a  fellow  workman's  negligence 
has  contributed  to  the  cause  of  the  accident.  Do  you  think  this  is  a 
fair  law  to  apply  to  modern  industry? 

32.  It  is  still  a  rule  of  law  in  some  states  that  a  worker  when  he 
takes  a  job  "assumes  the  risks  of  the  occupation,"  and  that  as  a  result 
he  cannot  recover  damages  at  law  if  he  is  injured  in  the  course  of  his 
work.  Does  it  seem  to  you  that  workmen  who  seek  employment  in 
a  steel  mill  or  other  large  factory  can  make  a  correct  valuation  of  the 
risks  involved  ? 


WISE   UTILIZATION   OF   HUMAN    RESOURCES      467 

33.  The  legal  precepts  stated  in  31  and  32  grew  into  our  law  when 
tools  were  simple  and  when  the  size  of  manufacturing  units  was  small. 
With  this  fact  before  you  do  you  see  what  is  meant  by  men  who  say 
that  such  laws  represent  an  outgrown  philosophy? 

34.  It  is  sometimes  said  that  the  greatest  difficulty  with  the  situa- 
tion in  which  labor  finds  itself  is  that  its  uncertainties  and  insecurities 
are  cumulative.    What  does  this  mean?    Does  it  seem  true  to  you? 

35.  Make  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society :  Selections  201-245. 
Bureau  of  Education,  Lessons  in  Comnmnitij  and  National  Life. 

Series  A,   Lesson  A-5,  Reticker,  "The  Human  Resources  of  a 
Community." 
Lesson  A-9,  Wright,  "Social  Control." 
Lesson  A-28,  Lyon  and  Hitchcock,  "  The  Worker  in 
Our  Society." 
Series  B,   Lesson  B-8,  Burgess,  "  Finding  a  Job." 

Lesson  B-30,  Hammond,  "  Employment  Agencies." 
Lesson  B-31,  Reticker,  "  Employment  Management." 
Series  C,   Lesson   C-8,  Park,   "  Preventing  Waste  of  Human 
Beings." 
Lesson  C-19,  Bramhall,   "  How  the  City  Cares  for 

Health." 
Lesson  C-30,  Andrews,  "Social  Insurance." 

The  teacher  who  desires  to  do  so  may  readily  give  additional  lessons 
on  the  position  of  the  worker  in  our  society  from  the  foregoing 
references  and  from  Taussig,  Principles  of  Economics,  revised  edition, 
Bk.  VI ;  Ely,  Outline  of  Economics,  3d  revised  edition,  Chaps.  XXII 
and  XXIII.' 


STUDY  XXV 
PLANNING,   GUIDING,  AND  CONTROLLING 

PURPOSES  OF  THIS  STUDY: 

*"    L   To  see  that  societies  may  move  toward  objectives. 

2.  To  attempt  to  ascertain  our  present-day  social  objectives. 

3.  To  see  by  what  methods  we  may  approach  our  changing  objectives. 

As  we  come  to  the  conclusion  of  this  study  of  our  economic 
organization,  certain  questions  naturally  arise  in  our  minds 
which  lead  us  beyond  a  mere  description  of  its  parts  and  how 
these  parts  are  assembled.  What  is  it  all  for?  Are  we  merely 
trying  to  keep  alive  ?  Are  we  trying  to  do  more  ?  Has  society 
any  ideals  or  ends  or  goals  or  objectives  toward  which  it  works  or 
is  it  blindly  groping  about  ?  If  there  is  some  ideal  or  pattern  to 
which  we  hope  to  have  our  economic  system  conform,  what  is  it  ? 
How  was  it  obtained?  What  methods  can  we  use  to  help  us 
modify  our  present  system  and  make  it  more  as  we  wish  it  to 
be?  Will  the  pattern  change?  These  questions  lead  us  into 
a  discussion  of  the  planning,  guiding,  and  controlling  of  our 
economic  activities. 

Groups  do  have  objectives.  —  Let  us  begin  by  noticing  that 
it  is  possible  for  groups  to  have  ends  or  goals  in  mind  and  that 
they  do  use  means  to  attain  these  ends.  Sometimes  the  mem- 
bers of  a  family  make  up  their  minds  that  they  will  work  for  a 
definite  purpose ;  perhaps  to  send  the  children  to  college,  per- 
haps to  finance  a  trip  to  Europe  five  years  in  the  future.  Where 
such  an  idea  is  firmly  fixed  in  the  minds  of  all  the  members  of 
the  family,  work  and  expenditures  are  planned  to  make  the 
realization  of  this  ideal  possible.  Each  member  of  the  family 
guides  his  conduct  in  large  measure  by  its  effect  on  the  accom- 
plishment of  this  objective.     If  some  course  of  action  helps 

468 


PLANNING,   GUIDING,   AND   CONTROLLING        469 

the  family  reach  its  goal,  it  is  called  a  good  policy.  If  it  hinders 
the  realization  of  the  family  objectives,  it  is  considered  a  bad 
poUcy. 

Communities  also  have  goals.  There  is  a  small  city  in  Illinois 
through  which  three  large  railroads  pass.  Accidents  were  fre- 
quent at  the  street  crossings  and  the  town's  people  became  im- 
bued with  the  idea  that  the  railroad  tracks  should  be  elevated. 
Each  time  an  accident  occurred,  or  even  when  traffic  was  blocked 
by  long  freight  trains,  there  was  warm  discussion  of  the  subject. 
The  newspapers  took  up  the  matter,  pubHc  meetings  were 
held  to  boom  track  elevation.  When  a  man  in  the  city  entered 
the  race  for  mayor  or  alderman  one  of  the  first  questions  that 
was  asked  was,  "  How  does  he  stand  on  track  elevation?  "  To 
recommend  him  it  was  only  necessary  to  show  that  he  favored 
the  plan.  To  damn  any  man  in  the  community  it  was  only 
necessary  to  show  that  he  was  opposed  to  this  community  ideal. 
Finally,  one  man,  while  mayor,  succeeded  in  getting  the  railroad 
heads  to  sign  an  agreement  to  elevate  the  tracks  and  build  a 
union  station  in  the  town.  The  achievement  made  him  locally 
famous  —  he  had  played  a  large  part  in  accomplishing  the 
community  objective. 

National  ideals  and  methods  are  clear-cut  in  times  of  war.  — 
Famihes  and  communities  are  not  the  only  groups  which  set  up 
ideals  and  objectives.  Nations  become  imbued  with  purposes 
and  these  purposes  become  national  ideals  or  aims.  These 
national  aims  are  likely  to  become  quite  definite  and  plain  in 
time  of  war.  In  our  Revolution,  for  example,  men  thought 
they  were  not  properly  treated  by  the  British  government  and 
sought  independence.  They  were  wiHing  to  risk  their  whole 
economic  system  in  the  hazards  of  war,  and  in  fact  did  so  risk 
it,  to  accomplish  their  object.  In  the  War  of  1812,  other  ideals 
were  at  stake.  It  was  said  that  we  must  determine  once  for  all 
our  claims  for  "free  trade  and  seamen's  rights."  In  the  Civil 
War,  the  North  as  a  community  expressed  their  ideal  in  the 
words,  "  The  Union  must  be  saved,"  and  in  those  other  words 
of  Lincoln,    "No  nation  can  exist  half  slave  and  half  free." 


470  OUR  ECONOMIC   ORGANIZATION 

In  the  South,  the  community  ideal  was  an  opposing  one.  The 
objective  of  the  South  was  to  estabhsh  the  rights  of  individual 
states  as  opposed  to  the  Union  as  a  whole.  The  phrase  "  state 
sovereignty "  expressed  their  objective.  Both  sides  risked 
everything  to  accomplish  their  ends. 

Perhaps  a  great  community  objective  was  never  better  ex- 
pressed than  by  President  Wilson  in  his  address  of  April  2,  1917, 
four  days  before  the  United  States  declared  war  on  Germany. 

"We  are  now  about  to  accept  gauge  of  battle  with  t^is  natural  foe 
to  liberty,  and  shall,  if  necessary,  spend  the  whole  force  of  the  nation 
to  check  and  nullify  its  pretensions  and  its  power.  We  are  glad, 
now  that  we  see  the  facts  with  no  veil  of  false  pretense  about  them, 
to  fight  thus  for  the  ultimate  peace  of  the  world  and  for  the  liberation 
of  its  peoples  —  the  German  people  included  —  for  the  rights  of 
nations  great  and  small  and  the  privilege  of  men  everjnvhere  to  choose 
their  way  of  life  and  of  obedience. 

"The  world  must  be  made  safe  for  democracy.  Its  peace  must  be 
planted  upon  the  trusted  foundations  of  political  liberty. 

"We  have  no  selfish  ends  to  serve.  We  desire  no  conquest,  ,no 
dominion.  We  seek  no  indemnities  for  ourselves,  no  material  com- 
pensation for  the  sacrifices  we  shall  freely  make.  We  are  but  one  of 
the  champions  of  the  rights  of  mankind.  We  shall  be  satisfied  when 
those  rights  have  been  made  as  secure  as  the  faith  and  the  freedom  of 
the  nation  can  make  them.  .  .  . 

"It  is  a  fearful  thing  to  lead  this  great  peaceful  people  into  war, 
into  the  most  terrible  and  disastrous  of  all  wars,  civilization  itself 
seeming  to  be  in  the  balance.  But  the  right  is  more  precious  than 
peace,  and  we  shall  fight  for  the  things  which  we  have  always  carried 
nearest  our  hearts  • —  for  democracy,  for  the  right  of  those  who  submit 
to  authority  to  have  a  voice  in  their  own  governments,  for  the  rights 
and  liberties  of  small  nations,  for  a  universal  dominion  of  right  by  such 
a  concert  of  free  peoples  as  shall  bring  peace  and  safety  to  all  nations 
and  make  the  world  itself  at  last  free." 

The  illustrations  of  national  goals  which  have  just  been  used 
have  been  chosen  from  the  ideals  which  have  been  before  our 
nation  in  time  of  war.  It  is  at  such  a  time  that  we  see  most 
clearly  that  such  goals  exist. 


PLANNING,   GUIDING,   AND   CONTROLLING        471 

Not  only  are  war-time  objectives  usually  definite  and  plain ; 
their  attainment  also  appears  possible  by  a  definite  and  plain 
method — the  defeat  of  the  enemy.  We  are  well  aware  that  the 
accomplishment  of  this  involves  bringing  to  bear  upon  the  task 
all  our  social  resources :  our  men,  women,  and  children,  our 
transportation,  our  forestry,  our  agriculture,  our  manufacture, 
our  schools,  our  churches  —  everybod}^  and  everything.  The 
nation  consciously  organizes  for  the  task.  All  other  things  are 
made  subordinate  to  the  great  central  aim. 

Our  social  objectives  difficult  to  formulate.  —  When  the  stress 
of  war  or  of  other  similar  emergency  has  passed,  our  social 
objectives  lose  clearness  of  definition.  Presumably  they  are 
still  present.  Certainly  history  shows  that  there  have  been  in 
the  past,  movements  of  societies  in  certain  directions.  In  the 
historical  part  of  this  book  we  have  seen  an  illustration  of  this 
in  the  movement  of  western  civilization  away  from  the  self- 
sufficing  manorial  economy  to  our  modern  interdependent 
cooperation  of  specialists,  with  all  that  connotes.  Even  if 
such  movements  of  societies  are  nothing  more  than  aimless 
drifts,  it  would  be  worth  while  for  us  to-day  to  try  to  see  the 
direction  of  our  own  drift.  And  if  such  movements  can  be  con- 
trolled or  guided  to  some  extent,  as  most  of  us  beheve,  even 
more  should  we  be  interested  in  a  navigation  chart  for  our  voyage. 

Can  any  one  state  our  present-day  social  objectives?  It  is 
not  easy  to  do.  We  seek  "  social  development  "  but  that  is  a 
very  vague,  many-sided  thing.  When  we  look  at  it  we  see 
things  but  dimly  —  we  see  "men  as  trees  walking."  One 
reason  why  we  are  in  doubt  concerning  precisely  what  we  wish  to 
accomplish  is  that  we  are  somewhat  undecided  concerning  the 
bearing  of  the  lessons  of  the  past.  We  are  in  the  midst  of  prob- 
ably the  greatest  changes  the  world  has  ever  seen  and  we  are  not 
certain  how  far  the  formulae  of  the  past  will  fit  the  new  condi- 
tions. Then,  too,  we  do  not  yet  know  a  great  deal  concerning 
what  are  called,  vaguely  enough,  social  forces,  so  that  we  have 
some  hesitation  about  drawing  up  new  formulae  of  our  own. 
We  get  little  help  in  our  thinking  by  turning  to  the  various 


472  OUR  ECONOMIC   ORGANIZATION 

specialized  groups  of  our  society  and  asking  them  what  goals 
should  be  set  up.  True,  these  groups  are  likely  to  have  some- 
what definite  aims  and  some  of  them  are  trying  their  best  to 
make  over  the  economic  order  to  suit  their  plans.  There 
is,  for  example,  the  union  labor  group.  This  group  has  some 
very  definite  ideals.  On  the  other  hand,  there  are  employers' 
associations  whose  ideals  are  frequently  opposed  to  those  of  the 
labor  unions.  There  is  also  a  group  that  is  primarily  interested 
in  foreign  trade.  The  farmers  have  certain  interests  in  com- 
mon and  they  are  attempting  to  make  our  economic  system  one 
which  will  be  to  their  benefit.  Unfortunately  many  of  the 
wishes  of  these  various  groups,  and  of  others,  are  in  conflict.  It 
is  easy  to  set  out  the  ideals  and  objectives  of  each  of  these  special- 
ized forms  of  producers,  but  it  is  difficult  to  reconcile  all  of  their 
purposes  into  a  common  purpose.  In  part,  however,  our  social 
objectives  are  made  up  from  the  objectives  of  smaller  groups. 
"  The  bitter  cry  of  the  children,"  the  complaint  of  the  worker, 
the  demand  for  a  square  deal  by  the  business  man  have  all 
been  heard  and  they  tend  to  get  fused  into  our  notion  of 
what  is  right. 

There  are  a  number  of  objectives  and  ideals  upon  which  all 
can  agree  at  least  in  words.  All  of  us  wish  our  country  well ; 
all  of  us  feel  that  the  prosperity  of  our  nation  will  be  in  a  way 
reflected  to  all  classes,  and  all  groups  are  desirous  of  seeing 
the  "  country  prosper."  There  are  some  intangible  objectives 
on  which  all  agree.  We  frequently  hear  stated  as  one  of 
America's  ideals,  "  Equal  rights  for  all  and  special  privileges 
for  none."  Nearly  any  one  in  America  will  say  that  he  be- 
lieves in  a  "  square  deal  "  ;  that  he  is  a  champion  of  "  fair  play  " 
and  of  "  justice,"  but  we  disagree  concerning  the  meaning  of 
such  terms.  For  example,  what  seems  to  some  laboring  men  to 
be  a  square  deal  may  appear  to  some  manufacturers  as  anything 
but  square. 

In  spite  of  the  difficulties  of  formulating  common  aims  for  a 
social  group  which  is  diversified  and  specialized,  a  number  of 
attempts  have  been  made  to  set  forth  ideals  towards  which  it  is 


PLANNING,   GUIDING,   AND   CONTROLLING        473 

believed  all  of  us  would  be  willing  to  help  guide  our  social 
system.  Among  the  aims  which  we  may  state  as  those  of 
interest  to  at  least  a  great  number  of  people  are  the  following :  ^ 

1.  That  the  purpose  of  our  whole  economic  system  is  the  creation 
of  a  type  of  human  being  which  shall  constantly  tend  to  improve  with 
each  passing  generation.  Society's  resources  shall  be  used,  not  for 
any  single  generation,  but  in  such  a  way  as  shall  make  possible  human 
development  for  the  centimes  to  come. 

2.  That  means  shall  be  provided  for  increasing  the  capital  equip- 
ment of  society,  and  its  store  of  acquired  knowledge  and  useful  in- 
stitutions, as  well.  This  of  course  involves  the  provision  of  means  to 
carry  on  from  one  generation  to  another  the  knowledge  which  will  be 
helpful  in  furthering  the  objects  of  society. 

3.  That  our  economic  order  shall  be  so  arranged  that  every  in- 
dividual may  feel  his  partnership  in  the  project  and  may  have  an 
opportunity  to  contribute  as  much  as  he  can  to  the  social  welfare. 
He  ought  not  to  be  handicapped  by  lack  of  education,  of  health,  or  of 
favorable  surroundings.  The  "rewards"  he  receives  should,  in  most 
cases  at  least,  be  in  proportion  to  services  rendered. 

4.  That,  assinning  pro\asion  in  comfort  for  those  who  through  mis- 
fortune are  unable  to  pro\ade  for  themselves,  all  persons  should  be 
encouraged  and  expected  to  contribute  to  the  effort  needed  in  carrying 
on  the  common  objects  of  society  and  should  be  restrained  from  carry- 
ing on  activities  which  would  be  harmful  to  the  attainment  of  the 
objectives  of  the  group  as  a  whole. 

5.  That  provision  should  be  made  either  through  schools  or  other 
instrumentalities  to  make  certain  that  all  individuals  are  kept  aware 
of  the  purposes  of  the  social  undertaking  and  are  kept  aware  of  the 
obUgations  which  this  undertaking  involves  upon  each  individual. 

In  an  earlier  paragraph  we  saw  that  when  a  family  sets  up 
some  objective,  that  very  fact  gives  its  members  a  "  standard 
of  judgment  "  concerning  the  worth whileness  of  courses  of 
action.  This  is  also  true  of  a  society.  If  some  such  formula- 
tion of  social  objectives  as  that  of  the  preceding  paragraphs  is 
accepted,  you  have  a  standard  by  which  you  can  measure  the 
worth  whileness  of  the  forces  and  institutions  round  about  you. 

*  Cf.  A.  W.  Small,  "A  Vision  of  Social  Efficiency,"  American  Journal  of  Sociology,  XIX 
(1913-1914),  pp.  435-439. 


474  OUR  ECONOMIC   ORGANIZATION 

Take,  for  example,  that  method  of  doing  things  which  we  call 
speciahzation  and  which  is  discussed  in  Studies  IX  to  XII.  If 
you  will  again  look  through  the  evaluation  of  specialization  in 
Study  XII,  you  will  see  that  the  judgments  there  expressed  were 
really  made  on  the  basis  of  the  ideals  or  goals  of  society  which 
we  have  just  been  formulating.  You  will  find  the  same  thing 
to  be  true  of  all  the  other  judgments  expressed  in  this  book. 
Indeed,  if  you  will  listen  to  the  judgments  your  friends  make  on 
matters  of  the  day  you  will  find  that  they  have,  very  likely 
without  knowing  it,  some  social  goal  or  ideal  in  mind.  You 
will  be  interested  in  trying  to  make  out  what  it  is. 

Methods  are  available  for  attaining  social  objectives.  — 
Granted,  now,  that  we  have  something  of  a  vision  of  the  goals 
toward  which  society  is  striving,  we  will  wish  to  help  in  shaping 
and  molding  our  economic  organization  in  such  a  way  that  it 
will  contribute  to  attaining  these  goals.  How  shall  we  go  about 
it  ?  We  shall  be  more  clear  in  planning  action  if  we  understand 
some  of  the  forces  which  explain  why  we  act  and  think  as  we 
do  to-day. 

We  think  and  act  in  customary  ways.  —  One  evening  after 
supper  a  group  of  boys  and  girls  were  playing  the  old  game  of 
Run,  Sheep,  Run.  A  man  who  was  unfamiliar  with  this  game 
watched  the  children  for  some  time  in  silence.  Finally,  he 
called  one  of  the  older  boys  to  him  and  asked  how  the  rules  of  the 
game  were  determined. 

The  only  answer  which  he  could  obtain  was  not  very  clear. 
The  boy  said  he  didn't  know  —  the  game  had  always  been  played 
this  way.  He  had  heard  his  father  say  that  he  used  to  play  it 
this  way.  Everybody  always  had  played  it  this  way.  Every- 
body now  plays  it  this  way. 

This  boy's  answer  to  the  inquisitive  gentleman  might  well 
be  one  answer  to  the  question  why  we  use  many  of  the  methods 
which  we  use  in  almost  every  phase  of  life.  Many  of  our  acts 
seem  to  have  little  sanction  behind  them  excepting  the  fact 
that  everybody  does  it  that  way.  That  is  the  way  it  is  done. 
Such  is  the  custom. 


PLANNING,   GUIDING,   AND   CONTROLLING        475 

Notice  a  few  simple  examples.  Why  do  gentlemen  in  America 
raise  their  hats  when  they  meet  a  lady  ?  There  is  no  law  requir- 
ing it.  In  some  countries  such  a  practice  is  unknown  and  would 
be  regarded  as  unusual  as  we  consider  it  customary  and  proper. 
Our  schools  are  full  of  customary  methods.  There  is  no  rule 
in  most  schools  requiring  students  to  face  the  teacher,  yet  no 
one  would  tliink  of  reciting  as  Chinese  students  formerly  did, 
with  their  backs  to  the  teacher's  desk.  The  rules  governing 
the  hour  of  beginning  and  dismissing  school  and  determining 
that  there  shall  be  a  vacation  on  Saturday  are  chiefly  the  result 
of  custom.  Stores  have  their  customary  hours  for  business. 
We  rise,  go  to  bed,  and  eat  our  meals  according  to  custom. 

Our  various  customs  are  likely  to  have  their  origin  in  some  use- 
ful practice  in  the  past.  It  is  said,  for  example,  that  in  medieval 
times,  before  many  Englishmen  could  even  write  their  names,  it 
was  customary  for  the  nobles  to  stamp  in  wax  the  seal  of  their 
coat  of  arms  to  represent  their  signature.  Written  agreements 
and  contracts  without  such  a  seal  were  not  enforceable  at  law. 
Now  most  people  can  wi-ite  their  names,  but  the  law  still  requires 
that  certain  contracts,  such  as  those  to  convey  real  estate  from 
one  owner  to  another,  must  have  a  seal  .opposite  the  name  of  the 
signer  to  make  the  agreement  binding.  This  seal  is  no  longer 
stamped  in  wax,  but  it  is  usually  printed  on  the  contract  or 
the  word  "  seal  "  is  written  in  with  a  pen.  It  really  is  of  no 
use  excepting  to  fulfill  the  legal  requirement.  It  is  a  survival 
of  an  old  custom.  Some  of  our  survivals  date  back  to  the  time 
of  primitive  man. 

Customary  ways  have  their  advantages.  —  We  must  not 
suppose  that  it  is  in  all  respects  unfortunate  that  we  are  so 
much  influenced  by  customary  ways.  It  is,  of  course,  alto- 
gether desirable  that  we  continually  construct  new  and  better 
methods  with  which  to  replace  old  customary  ones,  but  if  it 
were  not  for  our  tendency  to  follow  old  habits  we  should  fritter 
away  endless  time  and  energy.  Think,  for  example,  if  instead 
of  unconsciously  doing  things  in  habitual  ways,  you  had  from 
the  time  of  waking  this  morning  planned  and  reasoned  out 


476  OUR  ECONOMIC   ORGANIZATION 

your  every  act !  You  would  never  have  reached  the  breakfast 
table !  So  also  in  society  as  a  whole  customary  ways  are  a  great 
help.  If  it  were  not  for  the  influence  of  customary  ways,  there 
would  probably  be  such  a  variety  of  points  of  view,  standards, 
and  methods  in  a  community  that  it  would  be  almost  impossible 
for  us  to  live  and  work  together. 

People  get  along  fairly  well  in  their  own  country  because  all 
have  many  views  in  common.  We  have  all  been  taught  a 
customary  love  of  country,  we  have  been  taught  to  believe 
in  patriotism,  we  have  been  taught  that  certain  things  are  dis- 
honest or  immoral  and  must  not  be  done,  we  have  been  taught 
respect  for  the  same  laws  and  customs.  In  general,  our  views 
on  these  matters,  because  they  are  the  old  customary  views, 
are  much  alike  and  therefore  we  are  able  to  act  in  concert  and 
to  make  laws  and  follow  methods  with  which  the  large  majority 
agree.  Custom  rather  than  law  is  the  reason  why  most  of  us 
are  honest,  truthful,  courteous,  somewhat  good  tempered,  at 
least  semi-genial  and  capable  of  being  lived  with  without 
violence.     Custom  is  immensely  valuable. 

We  are  not  slaves  to  custom.  —  But,  as  we  saw  from  our 
study  of  medieval  times'  when  almost  everything  was  "  in  the 
rigid  cake  of  custom,"  custom  alone  means  stagnation.  It  is 
all  very  well  for  it  to  furnish  us  a  solid  basis  of  habitual  ways, 
but  it  should  furnish  us  only  a  basis  upon  which  to  operate  and 
7iot  a  cell  in  which  to  lead  a  cramped  existence.  As  a  matter 
of  fact  it  is  for  us  to-day  primarily  a  basis.  Research,  invention, 
scientific  analysis,  and  comparative  studies  are  our  watchwords 
to-day.  They  show  that  our  minds  are  active  (some  cynic  has 
said  that  the  human  mind  at  its  best  barely  works)  and  that  new 
currents  of  thought  and  new  ways  of  doing  things  are  continually 
being  developed.  We  may  call  these  rational  as  opposed  to 
customary  methods.  Some  of  these,  in  their  turn,  become  in 
time  habitual  and  customary,  so  that  the  basis  upon  which  we 
operate  is  continually  growing  larger  and  better. 

Many  institutions  mold  our  thoughts  and  acts.  —  We  have 
numerous    institutions  which   aid   in   transmitting    both   the 


PLANNING,   GUIDING,   AND   CONTROLLING        477 

customary  and  the  rational  methods  throughout  a  group,  or 
from  one  group  to  another,  or  from  one  generation  to  another. 

Important  among  these  institutions  is  the  family.  All  of 
us  as  children  get  our  ideals  and  our  habits  of  work  and  play 
by  imitating  the  activities  which  go  on  within  the  family  circle. 
Parents  are  continually  setting  children  examples  which  the 
children  follow  by  imitation.  One  writer  says,  "  So  rapidly 
does  this  imitative  process  go  on  that  by  the  time  the  eighth 
year  is  reached  it  seems  probable  that  the  foundation  lines  of 
the  child's  social  and  moral  character  are  laid."  ^  By  imitation 
each  generation  takes  up  and  makes  its  own  the  customs  and 
traditions  of  the  preceding  generations. 

When  we  realize  that  at  least  one  third  of  all  the  people  in 
the  world  are  children  who  are  being  taught  and  directed  very 
considerably  by  their  fathers  and  mothers,  we  can  see  how  im- 
portant is  the  family  as  an  agency  in  passing  down  the  material 
of  one  generation  to  the  next.  Some  of  the  important  matters 
and  methods  which  we  learn  to  carry  on  from  the  influence  of 
our  families  are : 

a.  Communication  —  that  is,  we  learn  to  talk,  and  perhaps  to  write 
and  read. 

b.  Our  ideas  concerning  right  and  wrong;  our  standards  concern- 
ing what  is  a  good  or  bad  action ;  proper  and  improper  conduct. 

c.  Many  of  our  ideas  of  religion. 

d.  We  learn  to  live  and  work  with  other  people  —  that  is,  we  learn 
to  yield  something  to  other  people's  point  of  view,  to  express  our  own, 
to  accept  criticism,  to  give  criticism,  and  to  cooperate  in  the  programs 
which  may  represent  a  composite  view  rather  than  the  definite  notion 
of  any  one  individual. 

Any  one  who  has  ever  been  to  school  can  see  at  once  how 
strongly  books  and  schools  tend  to  influence  us.  In  our  books 
we  read  how  things  are  done.  Teachers  explain  to  us  the  way 
in  which  various  activities  are  carried  on,  we  are  taught  how 
our  government  is  operated,  how  business  is  conducted,  how 
problems  in  mathematics  and  science  are  solved,  and  how  health 

'  From  E.  S.  Bogardus,  Introduction  to  the  Social  Sciences,  p.  174. 


478  OUR   ECONOMIC   ORGANIZATION 

is  cared  for.  We  are  also  taught  through  books  and  schools 
what  ideals  are  good  and  what  are  bad.  Our  schools  and  books 
impress  upon  us  standards  of  morals  that  have  been  fixed  upon 
as  desirable.  Certain  books  are  described  to  us  as  good  litera- 
ture, certain  music  as  good  music,  certain  pictures  as  good 
pictures ;  and  these  standards  of  older  persons  are  impressed 
upon  us  as  proper  standards  for  us  to  respect  and  copy.  We 
are  told  that  certain  attitudes  toward  our  teachers,  parents, 
and  other  persons  are  good  attitudes.  Thus,  the  older  genera- 
tion hands  down  to  the  new  both  its  customary  and  its  rational 
methods,  points  of  view,  and  standards. 

Churches,  the  press,  and  everyday  expressions  of  the  people 
about  us  all  have  important  influences  upon  us.  The  church 
services  teach  us  certain  established  standards  which  are 
accepted  as  the  right  ones.  These  are  in  large  part  standards 
of  the  past  which  are  reimpressed  upon  each  generation. 
Newspapers,  magazines  —  sometimes  together  spoken  of  as  the 
press  —  are  constantly  iterating  both  old  and  new  points  of 
view.  Besides  these  forces  there  is  all  about  us  every  day  the 
conversation  of  other  people.  Opinions  are  expressed  which 
assume  certain  standards,  which  assume  that  certain  things  are 
right  and  others  wrong,  which  assume  that  certain  points  of 
view  are  the  right  ones  from  which  to  look  at  the  questions  of 
the  day.  All  these  agencies  contribute  to  forming  what  we  call 
public  opinion,  and  public  opinion  greatly  molds  our  thinking. 

Even  a  short  list  of  our  institutions  should  not  omit  the  law. 
Often  law  is  little  more  than  a  formulation  of  custom.  In  our 
study  of  medieval  commerce,  we  read  of  the  customs  of  mer- 
chants who  met  at  the  old  fairs  in  England  and  on  the  conti- 
nent in  Europe.  These  customs  of  merchants  were  finally 
declared  to  have  the  force  of  law  in  England,  and  in  this  form  of 
law  they  still  survive.  The  laws  governing  contract  and  agency, 
and  the  laws  dealing  with  notes,  checks,  and  drafts  are  very 
largely  embodiments  in  law  of  old  medieval  customs.  On  the 
other  hand,  many  laws  are  "  thought  out."  They  look  toward 
the  establishment  of  some  new  structure  in  the  future  rather 


PLANNING,   GUIDING,  AND   CONTROLLING        479 

than  toward  a  formulation  in  words  of  some  custom.  Our 
recent  amendments  to  our  Constitution  establishing  woman 
suffrage  and  abolishing  the  liquor  traffic  are  cases  in  point. 
It  is  largely  through  laws  that  the  "  regulatory,"  "  promotive," 
and  "  prohibitive  "  intervention  of  government  mentioned  on 
page  321  is  worked  out,  and  of  course  it  follows  that  many  of 
the  methods  of  our  economic  system  are  determined  by 
laws. 

Powerful  forces  lead  to  changes  in  ideals  and  methods.  — 
Clearly  in  all  the  turmoil  of  expression  and  striving,  some 
institutions  and  some  persons  have  vastly  more  power  to 
influence  us  than  others.  A  tremendous  power  is  held  by  the 
press  —  the  newspapers  and  magazines  of  the  country.  More, 
perhaps,  than  any  other  force  does  the  press  dominate  us  and 
influence  us  to  believe  what  those  who  control  the  press  wish  us  to 
believe.  Plainly,  where  so  much  power  is  placed  there  is  lodged 
an  awful  responsibility.  Schools  have  immense  opportunity, 
through  their  teaching  of  youthful  minds,  to  indicate  the  desira- 
bility of  certain  objectives.  Thus,  in  teachers  and  in  the 
writers  of  books  there  is  placed  a  tremendous  power  and  a 
tremendous  responsibility.  Men  who  have  attained  high 
position  either  through  election  to  office  or  their  ability  to  com- 
mand the  attention  of  others  through  speech  and  writing  in- 
fluence us  in  the  determining  of  our  ideals,  and  they  must  be 
held  responsible  in  accordance  with  their  power. 

Of  one  other  thing  we  may  be  sure.  Whatever  may  be  our 
ideals  now,  they  will  not  remain  permanently  the  same.  The 
forces  which  have  been  constantly  at  work  creating  our  ideals 
and  ends  will  be  continuously  at  work  re-creating  and  renewing 
our  purposes  and  leading  us  farther  and  farther  upon  the  road 
we  call  progress.  So,  too,  with  the  methods  which  we  have 
used  to  reach  our  goals.  At  present,  we  are  turning  more  and 
more  to  government  and  law  to  remold  our  social  order  that  it 
may  accompHsh  the  things  which  we  wish.  This  method  may 
be  temporary  or  it  may  be  relatively  permanent.  Whether 
we  shall  continue  to  give  more  and  more  control  to  the  central 


480  OUR  ECONOMIC   ORGANIZATION 

governmental  authorities  will  depend  upon  our  decision  as  to 
the  best  method  of  making  progress  towards  our  goals. 

Governmental  intervention  a  good  illustration  of  changing 
ideals  and  methods.  —  Since  we  are  to-day  turning  so  much 
to  government  and  law  as  means  of  reshaping  our  social  order, 
it  is  worth  our  while  to  return  to  page  119  and  to  take  up  again 
the  historical  account  of  governmental  intervention.  It  will  be 
a  sketch  of  changing  ideals  and  methods  in  one  phase  of  social 
control.  Of  course,  other  phases  (for  example,  codes  of  ethics) 
lend  themselves  to  similar  sketches,  but  a  sample  must  suffice. 

We  have  already  seen  (Study  V)  that  in  medieval  England  there 
were  certain  ideals  or  standards,  such  as  the  doctrine  of  just 
price,  which  profoundly  influenced  the  actions  of  government, 
and  that  the  laws  of  the  time  were  to  a  great  extent  statements 
of  customary  practices. 

Mercantilistic  ideals  meant  mercantilistic  organization.  —  We 
have  seen  also  (Studies  VI,  VII,  and  VIII)  that  gradually  the 
medieval  system  gave  place  to  other  methods  of  gratifying  wants 
and  there  arose  the  ideal  of  strong  national  life.  In  keeping  with 
this  new  ideal  changes  were  made  in  the  economic  organization. 
Some  of  them  were  consciously  or  knowingly  made ;  others 
came  in  without  people  being  really  aware  of  them.  We  are, 
at  this  point  in  our  study,  particularly  interested  in  the  fact 
that  under  this  new  system  (you  will  remember  that  we  called 
it  mercantilism)  there  was  a  large  measure  of  regulation  of 
industry  by  the  central  government  instead  of  by  the  gild  and 
manorial  organizations  as  had  formerly  been  the  case.  These 
regulations  were,  of  course,  drawn  with  the  idea  of  so  organizing 
the  economic  system  that  a  strong  nation  would  be  the  out- 
come. For  example,  they  thought  that  a  strong  nation  must 
have  a  large  supply  of  money.  Accordingly  it  was  forbidden 
to  send  gold  and  silver  out  of  the  country ;  manufactures  at 
home  were  encouraged  and  the  purchase  of  manufactured  goods 
from  abroad  was  discouraged  so  that  the  country  could  take  in 
more  money  for  the  goods  which  it  exported  than  it  would  pay 
out  for  goods  which  it  imported.     This  idea  is  expressed  in  brief 


PLANNING,   GUIDING,  AND   CONTROLLING        481 

by  saying  that  they  wished  to  have  the  "  balance  of  trade  " 
in  their  favor.  Again,  they  encouraged  certain  industries  with 
the  hope  of  having  the  nation  self-sufficing  in  time  of  war  and 
they  had  trade  and  navigation  acts  aimed  at  weakening  other 
nations  while  strengthening  their  own.  These  illustrations 
show  how  the  economic  system  was  shaped  in  terms  of  an 
ideal. 

Laissez  faire  meant  a  different  organization.  —  With  chang- 
ing conditions  (see  Studies  VI,  VII,  and  VIII  for  an  account  of 
these  changes)  new  ideals  arose.  The  minute  regulations  of 
mercantilism  (see  p.  120)  became  onerous ;  belief  in  the  "  divine 
right  of  kings  "  and  in  submitting  to  "  authority  "  yielded 
gradually  to  a  belief  in  "  individualism."  All  this  came  to 
be  expressed  as  a  belief  in  a  ''  natural  order."  It  was  thought 
that  this  natural  order  could  not  be  changed  by  man ;  it  was 
unchangeable.  It  was  believed  that  when  man  tried  to  change 
it  he  merely  set  up  friction  and  brought  about  unpleasant  con- 
sequences. The  thing  for  man  to  do  was  to  find  out  what  this 
natural  order  was,  and  then  conform  to  it.  In  the  economic 
realm,  the  natural  conclusion  of  such  thinking  was  "  let  things 
alone,  let  us  have  no  interference  or  regulations,  —  laissez  faire, 
laissez  passer,^'  and  along  with  this  went  the  belief  that  the 
individual,  if  allowed  to  seek  his  own  self-interest,  would  be 
led  "as  by  an  invisible  hand  "  to  promote  social  welfare.  He 
would  automatically  "  conform  to  the  natural  order." 

We  might  summarize  the  changes  proposed  by  the  advocates 
of  laissez  faire  as  follows : 

1.  Freedom  from  governmental  interference  with  business  within  a 
coimtry. 

2.  Freedom  for  workers  to  move  from  place  to  place  and  make  such 
contracts  as  they  could. 

3.  Freedom  for  business  men  to  enter  almost  any  business  they 
liked  and  to  operate  it  without  governmental  interference. 

With  this  new  ideal  before  Englishmen,  they  began  to  revise 
the  economic  organization.     The  chief  form  of  their  revision 


482  OUR  ECONOMIC   ORGANIZATION 

was  to  do  away  with  many  of  the  old  rigorous  regulations,  to 
put  more  and  more  power  in  the  hands  of  the  individual,  and  to 
allow  an  increasing  amount  of  self-initiative.  It  is,  of  course? 
as  a  result  of  this  change  that  we  have  so  extensively  the  in- 
dividual organization  of  production  which  we  studied  in  the 
earlier  lessons.  The  individual  was  given  a  freedom  in  business 
which  he  had  not  possessed  earlier. 

One  might  well  ask  how  it  could  be  expected  that  individuals 
would  not  do  many  things  which  would  be  harmful  to  others 
if  they  were  given  so  large  an  amount  of  freedom.  The  answer 
was  made  (and  still  is,  for  we  still  have  a  great  many  of  the 
methods  adopted  under  this  change),  first,  that  it  was  per- 
missible for  the  state  to  forbid  certain  things,  and,  second,  that 
the  individual  in  seeking  his  own  interest  would  necessarily 
contribute  to  the  welfare  of  society.  The  answer  was  also 
given,  and  still  is,  that  competition  would  serve  as  a  regulating 
force.  Competition  was  trusted  to  eliminate  producers  of  bad 
wares,  to  eliminate  the  charging  of  unduly  high  prices,  to  bring 
about  the  use  of  the  best  processes,  and  to  bring  more  favorable 
results  than  could  be  brought  about  by  a  system  of  regulation 
and  law. 

Governmental  intervention  again  comes  in.  —  It  is  probably 
safe  to  assert  that  for  100  years  after  1750  both  in  England  and 
America  the  ideal  of  laissez  faire  and  the  natural  order  was  the 
one  towards  which  the  greater  number  of  intelligent  and  in- 
fluential people  worked.  In  America,  indeed,  the  grip  of 
laissez  faire  was  even  stronger  and  lasted  longer  than  in  England. 
The  main  reason  for  this  is  that  there  have  been  in  America 
such  abundant  opportunities  for  the  advancement  of  the  indi- 
vidual that  governmental  protection  seemed  quite  unnecessary. 
There  seemed  to  be  substantial  equality  of  opportunity  for 
every  one,  and  in  subduing  the  new  territories  it  seemed  that 
the  individual  in  following  his  own  self-interest  was,  in  the  main, 
promoting  social  welfare.  Many  persons,  among  them  many 
thoughtful  ones,  still  believe  that  much  governmental  inter- 
ference with  an  individual's  freedom  of  choice  or  self-direction 


PLANNING,   GUIDING,   AND   CONTROLLING        483 

will  bring  more  harm  than  good.  Nevertheless,  the  ideal  of 
laissez  faire  has  ceased  to  be  as  attractive  as  it  was  one  hundred 
years  ago  and  the  reasons  are  not  far  to  seek. 

To  begin  with,  it  came  to  be  seen  that  there  were  distinctly 
undesirable  consequences  of  laissez  faire.  Among  the  workers 
in  the  factories  and  mines  some  of  these  results  were  first 
observed.  Children  as  young  as  six  and  seven  years  of  age 
were  not  infrequently  employed  in  factories.  Women  hired 
themselves  for  monotonous  factory  labor  for  twelve  and  four- 
teen hours  a  day  and  worked  under  unspeakable  conditions  in 
coal  mines.  The  factories  in  which  people  worked  were  fre- 
quently ill-ventilated,  ill-lighted,  noisy,  and  unsanitary.  The 
machines  used  were  often  unprotected  and  dangerous.  Yet  all 
this  was  in  keeping  with  the  theory  of  "  let-alone."  The  owner 
of  an  unsanitary  factory  where  women  and  children  were  fright- 
fully overworked  might  very  honestly  have  answered  accusa- 
tions by  saying  that  he  was  doing  nothing  unfair  as  his  employees 
took  this  work  of  their  own  free  will.  Children,  who  most  of  us 
now  think  should  be  in  school,  might  have  answered  very 
honestly  that  they  had  a  right  to  do  as  they  pleased  and  to 
spend  their  childhood  in  factory  work  if  they  wished.  Observers 
who  were  interested  in  social  well-being,  however,  did  not 
regard  these  conditions  with  calmness.  They  began  to  express 
the  behef  that  women  and  children  must  be  protected  even 
against  their  own  wishes  if  the  race  was  not  to  deteriorate.  As 
a  result  of  agitation  by  such  observers,  laws  were  passed  in 
England  as  early  as  1802  imposing  restrictions  on  the  condi- 
tions under  which  employees  were  allowed  to  work.  This  may 
be  regarded  as  a  typical  illustration  of  the  gradually  recog- 
nized need  of  regulation. 

In  the  second  place,  there  came  about  a  different  attitude 
toward  government  and  its  workings.  In  the  days  when  "  the 
government  "  was  an  arbitrary  king,  suspicion  concerning  its 
attitude  was  natural.  With  the  growth  of  democratic  ideals, 
however,  and  the  development  of  government  that  was  more 
an  expression  of  the  will  of  the  people,  such  suspicions  tended 


484  OUR  ECONOMIC   ORGANIZATION 

to  disappear.  In  other  words,  there  came  about  more  of  a 
willingness  to  use  this  agency  as  a  means  of  promoting  social 
welfare. 

In  the  third  place,  we  have  attained  more  knowledge  of  social 
causes  and  effects,  meager  as  the  knowledge  still  is.  Certainly 
we  have  more  of  a  sense  of  collective  responsibility;  we  see 
more  clearly  that  ours  is  a  cooperative  society  and  that  all 
society  has  a  very  real  interest  in  the  development  of  the  indi- 
vidual. We  think  we  see  something  of  social  goals  and  how  to 
approach  them,  if  only  with  halting  steps.  We  are  accordingly 
more  willing  than  formerly  to  use  the  various  methods  of 
approach ;  among  others,  governmental  control. 

Finally,  and  possibly  most  important  of  all,  most  of  us  no 
longer  believe  in  "an  unchanging  natural  order."  We  believe 
it  can  be  changed,  and  that  by  our  actions.  The  most  im- 
portant single  cause  for  this  belief  is  found  in  the  work  of  Charles 
Darwin.  He  and  his  followers  have  shown  us  that  there  is 
change,  or  evolution,  in  the  physical  world  and  that  man  can 
affect  it,  —  witness  the  work  of  Burbank.  An  "  evolutionary 
philosophy,"  as  opposed  to  a  natural  order  philosophy,  has 
sprung  up  which  has  been  carried  over  into  the  social  sciences 
and  seems  there  to  be  applicable.  Since  we  now  believe  the 
economic  order  can  be  changed,  since  we  think  we  see  desirable 
goals,  and  since  we  think  we  know  something  of  methods  of 
attaining  these  goals,  we  make  use  of  them.  Among  others,  we 
make  use  of  governmental  control. 

Throughout  our  study,  we  have  seen  so  many  instances  of 
prohibitive,  promotive,  and  regulatory  activities  of  govern- 
ment in  recent  times  that  no  extended  discussion  or  illustra- 
tion is  here  necessary.  It  ought  to  be  pointed  out,  indeed,  that 
some  observers  contend  that  we  are  overdoing  the  matter ;  that 
we  are  grinding  out  "  half-baked  laws  "  so  rapidly  that  no  one 
can  learn  what  they  are  or  what  they  mean  before  the  legisla- 
tures have  ground  out  a  new  "  batch."  In  the  case  of  one  state 
1520  laws  were  passed  in  one  session.  It  is  hard  to  believe 
that  they  were  all  well  planned. 


PLANNING,   GUIDING,   AND   CONTROLLING        485 

Knowledge  and  understanding  prerequisites  to  good  citizen- 
ship. —  Perhaps  in  the  last  sentence  there  is  an  implication 
that  we  shall  do  well  to  notice.  Change  is  not  necessarily  prog- 
ress. It  is  entirely  possible  to  use  our  various  instrumentali- 
ties of  social  control  unwisely.  They  may  be  used  to  bring 
disorder  and  even  disaster.  If  it  is  highly  important  to-day 
that  we  make  changes  for  the  better  (every  thoughtful  student 
of  our  social  order  sees  in  it  many  serious  defects),  it  is 
equally  important  that  we  refrain  from  making  changes  for 
the  worse.  We  must  strive  to  hold  the  great  gains  and  achieve- 
ments which  we  have  made.  In  our  country,  power  to  make 
changes  rests,  at  the  last,  with  its  citizens.  The  changes  which 
they  bring  about  should  be  made  with  adequate  knowledge  of 
our  present  economic  organization,  its  points  of  strength,  its 
weaknesses,  its  essential  features,  its  historical  development, 
and  its  present  tendencies  toward  change.  If  the  study  we  have 
made  has  contributed  to  this  end  in  your  own  case,  its  mission 
has  been  performed. 

PROBLEMS 

1.  Can  you  cite  any  goals  which  your  family  has  set?  Can  you 
mention  any  methods  which  its  members  use  in  order  to  arrive  at  the 
goals  ?  Do  you  see  that  having  a  goal  enables  the  members  to  have  a 
"standard  of  judgment"  concerning  the  wisdom  of  certain  actions? 

2.  Can  you  name  any  goals  of  the  community  in  which  you  Uve? 
If  so,  what  agencies  are  available  for  the  community  to  use  in  attain- 
ing its  objectives  ? 

3.  Draw  up  a  list  of  reasons  why  it  is  harder  to  state  the  peace-time 
objectives  of  a  nation  than  it  is  to  state  its  objectives  in  time  of  war. 

4.  Look  again  at  the  judgments  concerning  trusts  on  pages  309-11. 
Try  to  relate  these  to  the  social  ideals  expressed  on  page  473. 

5.  Review  the  arguments  for  taking  better  care  of  our  human  re- 
sources. (Study  XXIV.)  Do  they  fit  in  with  the  social  ideals  ex- 
pressed on  page  473? 

6.  Do  you  think  slavery  a  good  thing?  Poverty?  International 
trade?  The  spread  of  scientific  knowledge?  Are  your  answers  in 
terms  of  the  social  ideals  on  page  473? 


486  OUR  ECONOMIC   ORGANIZATION 

7.  Make  a  list  of  customary  or  traditional  ways  which  seem  to 
you  good  ways. 

8.  What  is  meant  by  saying  that  we  are  fundamentally  creatures 
of  the  past  with  a  veneer  of  the  present  upon  us  ? 

9.  We  sometimes  hear  it  said  of  a  new  law  that  it  will  be  difficult 
to  enforce  because  it  breaks  too  sharply  with  tradition.    Explain. 

10.  Write  out  a  paragraph  comparing  the  importance  of  custom  in 
the  medieval  period  with  its  importance  to-day. 

11.  "Laws  are  congealed  custom."  What  does  this  mean?  Give  five 
cases  of  laws  which  cannot  be  said  to  be  congealed  custom. 

12.  Is  conscience  a  factor  in  social  control?  Is  respect  for  the 
opinion  of  others  ?    Tell  why  you  answer  as  you  do. 

13.  Does  the  church  play  a  part  in  controlling  social  conduct  to-day? 
Does  it  play  as  large  a  part  as  it  did  in  medieval  society?  Does  edu- 
cation?    Does  public  opinion? 

14.  Is  a  business  establishment  an  agency  of  social  control  ?  Is  it  a 
place  in  which  traditional  ways  of  doing  things  are  passed  on?  In 
which  new  ways  are  devised  and  passed  on?  In  which  standards  of 
honesty  are  developed  ? 

15.  There  are  such  things  as  professional  standards.  For  example, 
physicians  ordinarily  frown  upon  advertising  their  services  in  news- 
papers. Find  other  illustrations.  What  gives  such  standards  any 
binding  power?  Are  they  imposed  for  the  good  of  society  or  for  the 
good  of  the  profession  ? 

16.  Is  the  union  label  an  agency  of  social  control?  Is  the  trade 
union?  The  Republican  party?  The  SociaUst  party?  Congress? 
Tell  why  you  answer  as  you  do  in  each  case. 

17.  Although  some  of  the  points  are  not  covered  in  your  reading 
tell  how  each  of  the  following  plays  a  part  in  social  control.  An  illus- 
tration of  the  working  of  each  will  give  you  a  start,  (a)  Imitation ; 
(6)  fashion;   (c)  education;   (d)  the  law;   (e)  religion. 

18.  Draw  up  a  Ust  of  the  factors  which  contribute  to  the  formation 
of  public  opinion.  Should  you  say  that  it  is  formed  by  th(j  few  or  by 
the  many? 

19.  Draw  up  in  parallel  columns  the  factors  making  for  and  against 
the  formation  of  public  opinion  that  is  holiest  and  disinterested. 


PLANNING,   GUIDING,   AND   CONTROLLING        487 

20.  It  has  been  said  that  control  of  industrial  affairs  in  the  medieval 
period  may  be  characterized  by  the  propositions  that  (a)  control  was 
customary,  (b)  control  was  local.  Do  these  statements  properly 
characterize  control  of  modern  industry? 

21.  Name  five  persons  who  have  helped  greatly  in  bringing  our 
American  social  ideals  to  their  present  position.  Can  you  tell  what 
each  contributed  ? 

22.  We  sometimes  hear  it  said  that  a  man  was  too  far  ahead  of  his 
times  to  be  properly  appreciated.     Explain. 

23.  Look  again  at  the  reasons  why  there  has  been  in  recent  years  an 
increasing  intervention  of  goverrunent  in  the  control  of  business  and 
other  social  activities.  Do  you  think  there  will  continue  to  be  much 
goverrmiental  intervention  ? 

24.  Show  just  why  a  person  who  beheved  in  evolution  could  not 
believe  in  the  "natural  order." 

25.  "The  passing  of  the  frontier  with  the  accompanying  narrowing 
of  opportunity  helped  to  cause  Americans  to  reject  laissez  faire  as  a 
satisfactory  ideal."     Explain. 

26.  Suppose  some  one  says,  "  I  do  not  think  we  should  have  such  a 
thing  as  social  control."  Could  we  escape  from  social  control  or 
shall  we  have  it  whether  we  wish  to  or  not ;  whether  we  are  aware  of 
it  or  not? 

27.  Draw  up  an  outline  of  the  main  points  in  this  lesson. 

References  for  Further  Study 

Marshall,  Readings  in  Industrial  Society:  p.  989  and  Selections 
378-^14. 

Teachers  who  wish  to  expand  this  section  may  readily  do  so  by  using 
one  or  more  of  the  following  : 

(a)  On  Programs  of  Reform,  such  as  Socialism,  Communism,  Single 
Tax,  etc.,  chapters  in  almost  any  standard  college  text  in  Economics. 

(6)   On  Competition,  Readings  in  Industrial  Society:  pp.  885-946. 

(c)  On  Private  Property,  Readings  in  Industrial  Society :  pp.  947- 
988. 

(d)  On  Responsible  Agents  in  the  Guidance  of  Economic  Activity, 
Readings  in  Industrial  Society:  pp.  824-884. 


INDEX 


Absentee  capitalism,  279. 

Accidents :  industrial,  451-52,  455, 
459;  preventable,  a  great  waste, 
450;  railroad,  390,  469. 

Accounting,  198;  a  great  aid  in 
economic  regulation,  409-12;  be- 
ginnings of,  99-100. 

Acquired  knowledge,  see  Knowledge, 
acquired. 

Adaptation,  active,  4,  5,  25,  56,  127, 
448 ;  and  acquired  knowledge,  16 ; 
and  capital,  15-16;  and  labor 
power,  14-15;  and  natural  re- 
sources, 11-14;  and  science,   109. 

Adaptation,  passive,  3. 

Adaptation  to  environment,  3. 

Administration,  business,  see  Busi- 
ness administration. 

Administrative  talent  and  technique, 
198,  200. 

Advertisement,  first  newspaper,  96. 

Advertising :  ethics  of,  414 ;  impor- 
tant factor  in  apportionment,  341 ; 
in  large  basiness  units,  257,  263 ; 
lessens  risks  of  entrepreneur,  380- 
81 ;  national,  242. 

Advertising  agencies  as  research 
bureaus,  388-89. 

Agricultural  classes,  76,  111. 

Agricultural  experiment  station,  391. 

Agricultural  industries,  168. 

Agricultural  laborers,  76,  111. 

Agricultural  regions  of  Middle  West, 
168,  181. 

Agricultural  schools,  391. 

Agriculture,  280;  capitalistic,  be- 
ginnings of,  74-76;  cooperative, 
287;  English,  in  1750,  106;  limits 


of  specialization  in,  197;  machine 
in,  215-16,  221,  262;  medieval, 
organization  for,  26-36,  42,  74; 
present  day,  32,  36;  revolution 
in,  110;  vill,  36.  See  also  Farm- 
ing. 

Agriculture,  United  States  Depart- 
ment of,  440. 

Amalgamation,  297. 

American  Farm  Bureau  Federation, 
299. 

American  Federation  of  Labor,  299, 
323. 

American  Revolution,  120,  121,  469. 

American  Tobacco  Company,  296. 

Androscoggin  River,  434. 

Apportionment  of  productive  re- 
sources, 316;  among  the  various 
enterprises  of  the  community, 
373-92;  and  advertising,  341 ;  and 
competition,  330;  and  financial 
institutions,  354-72;  and  gov- 
ernment, 321-22;  and  money, 
335-42;  and  social  institutions, 
322-23;  by  collective  will,  320, 
321;  complexity  of,  317;  general 
survey  of,  316-34 ;  on  basis  of  com- 
parative gains,  327,  335;  meas- 
uring sticks  used  in  comparisons, 
336,  339;  through  entrepreneur, 
327-30,  373;  through  individual 
initiative,  320;  within  the  busi- 
ness unit,  397-418. 

Apprenticeship,  indenture  of,  49. 

Apprenticeship  system  of  the  gild, 
47,  48-50,  80,  81,  455. 

"Arbitrating"  in  grain  exchanges, 
140. 

Arkwright,  Richard,  112. 

Asphalt,  311. 


489 


490 


INDEX 


Assizes  of  bread,  44,  68. 

Associated  Advertising  Clubs  of 
America,  414. 

Astrolabe,  77. 

Atlantic  Coast  Line  Company,  295. 

Automobile  factory,  326 ;  specializa- 
tion in  management  of,  154-55 ; 
proper  organization  in,  401. 

Automobile  horn  manufacture,  ad- 
vertising in,  388. 

Automobile  industry,  331,  375. 

B 

"Bad  times"  in  industry,  453. 

Bailiff  of  the  manor,  30,  33. 

Balance,  essential  in  cooperation  of 
specialists,  315. 

Balance  of  trade,  481. 

Balk,  29. 

Bankers,  386;  as  functional  middle- 
men, 90-93,  369. 

Bankruptcy,  377. 

Banks  and  banking,  296,  344,  354- 
72;  commercial,  356,  357-58,  361; 
beginnings  of,  64,  91,  109;  com- 
panies, 364;  depositors,  358,  361; 
loans,  356-361 ;  savings  banks, 
135,  337,  365;  shareholders,  358, 
361. 

Barter,  199,  200,  367;  double  coin- 
cidence of,  199,  336,  342. 

Black  Death,  73,  74,  75. 

Bland,  Brown,  and  Tawney,  49. 

Blast  furnace,  medieval,  107. 

"Blue  sky"  laws,  279. 

Board  of  trade,  137,  381,  384. 

Bohm-Bawerk,  Eugen  von,  213, 
214. 

Bogardus,  E.  S.,  477. 

Bond  hoases,  136. 

Bond  of  a  public  utility  company, 
copy   of,   283. 

Bonds,  276,  281,  284-85,  288,  296, 
364,  365;  kinds  of,  285. 

Bookkeeping,  medieval,  60,  100. 

Boon-work,  31. 

Boone,  Daniel,  2,  316,  318. 


Bradstreet's  Commercial  Agency, 
380,  387. 

Branch  plants,  254,  256,  258. 

Branch  stores,  242,  261. 

Bricklaying,  work  of  efficiency  en- 
gineer  in,    398-401. 

"Broad  tape,"  384,385. 

Brogger,  98. 

Brokers,  364,  366,  382. 

Buckle,  H.  T.,  120. 

Budget,  family,  338. 

Building  industries,  453. 

Business  administration,  251,  257, 
262. 

Business  depression,  378. 

Business  education,  330;  of  gilds, 
48. 

Business  failures,  379;  causes  of, 
379,  380;  number  of,  in  United 
States  in  recent  years,  379. 

Business  information,  96,  137,  138, 
387-92. 

Business  law,  beginnings  of,  63-64. 

Business  management  and  manager, 
see    Management    and    Manager. 

Business  men  and  money,  338,  340. 
See  also  Credit  Loans. 

Business  organization  :  internal,  397- 
418;  minor  types  of,  285.  See 
also   Business   units. 

Business  panics,  377-78. 

Business  research  bureaus,  389-90. 

Business  units :  cooperate  in  pro- 
ducing services,  134;  designed  to 
extend  and  to  concentrate  control, 
292-314;  growth  of  large,  250; 
size  of  maximum  efficiency  of, 
250-67;  usual    types   of,    268-92. 

Butcher,  251,  252. 

By-products,  239,  262 ;  of  coal,  423 ; 
of  the  packing  industry,  255. 


Campbell,  Marius  R.,  420,  421,  422. 
Canals,    116.     See  also   Waterways. 
Cannan,  Edwin,  20,   194. 
Canning  industry,  452. 


INDEX 


491 


Capital :  active,  growth  of,  in  United 
States,  220 ;  specialization  of,  152, 
194 ;  fixed,  269,  355,  378 ;  secured 
through  investment  institutions, 
361;  idle,  456;  waste  of,  398; 
working,  269,  355,  361. 

Capital  goods,  5,  6,  15,  319;  and 
risks,  373-81. 

CapitaUsni,  119;  absentee,  279;  in- 
coming of,  118. 

Capitalistic  monopolies,  309,  311. 

Carding,  112,  113. 

Carnegie,  Andrew,  258. 

"Carnegie  interests,"  258,  259. 

Carriers,  94. 

Carver,  T.  N.,  129,  211,  280,  305, 
449,  450. 

Caste  systems,  331. 

Cattle-raising  industrj^,  254. 

Census,  medieval,  32. 

Census  reports,  United  States,  5,  169, 
219. 

Central  government,  59,  68,  79,  89, 
97,  480. 

Changing  society,  414. 

Channing,  18. 

Chapmen,  62,  65,  94,  99. 

Charters  of  corporations,  293 ;  of 
medieval  towns,  51. 

Check,  common  form  of,  359. 

Cheyney,  110,  121. 

Chicago  Board  of  Trade,  138. 

Chicago  packing  industry,  251-56, 
299. 

Child  labor,  154,  173,  322,  414,  483. 

Church,  478;  as  aid  to  commerce, 
67-68. 

Church  and  Alford,  403. 

Cities,  large,  177. 

Citizenship,  knowledge  prerequisite 
to,  485. 

Civil  War,  303,  469. 

Clark,  J.  B.,  227. 

Classes,  see  Social  classes. 

Clay,  Henry,  127,  157,  174,  192,  193, 
328,  369. 

Clayton  anti-trust  act,  307. 

Cleveland,  F.  A.,  285. 


CUmate,  168. 

Close,  manorial,  29. 

Cloth  manufacture,  225;  in  Eng- 
land, 79-84. 

Clothes-making,  122. 

Clothier,  81-83,  90,  98,  456. 

Coal  and  coal  mining,  424,  453; 
annual  consumption,  420;  an- 
thracite, 311,  421;  by-products, 
423 ;  conservation,  420 ;  consump- 
tion, 421;  derivations  of,  224; 
duration  of  supply,  420-21 ;  field 
of  coal  in  U.  S.,  12,  443;  losses, 
423-25,  government  work  to  re- 
duce losses,  423-24;  methods  in 
mining,  422-425 ;  production,  420, 
421;  supply,  421,  425;  use  of 
coal,  172,  420. 

Coes,  H.  v.,  176. 

Coinage,  59,  79,  343-44. 

Coketown,  185-87,  195. 

Cold-storage  rooms,  253. 

Collective  will  in  the  guidance  of 
economic  activity,  321,  336. 

Colonists,  Virginia,  18. 

Colonization,  89,   117. 

Commerce,  concentrative  forces  in, 
261.  See  also  Trade  and  commerce. 

Commerce,  medieval  (EngUsh),  56- 
58;  characteristics  of,  65-67; 
social  control  of,  67-68;  why 
meager,  57. 

Commerce  (1750)  English,  107. 

Commercial  agencies,  387. 

Commercial  arithmetic,  beginning 
of,  99. 

Commercial  banks,  see  under  Banks 
and  banking. 

Commercial  bill  of  exchange,   357. 

Commercial  credit  companies,  361. 

Commercial  education,  beginning 
of,  61. 

Commercial  enterprises,  factors  de- 
termining location   of,    177-78. 

Commercial  law,  origin  of,  63. 

Commercial  paper  houses,  361. 

Commercial  treaties,  58. 

Commodity  money,  343. 


492 


INDEX 


Common  pasture,  29. 

Common  stock,  281-84,  293,  296. 

Communication,  96,  116,  182,  257, 
280;  medieval,  57,  66. 

Communistic  society,  18,  316,  373. 

Community  objectives,  469. 

Commutation  of  services,  73,  74. 

Compass,  60,  76,  77. 

Competition,  308,  331,  482;  cut- 
throat, 242,  259,  302. 

Competitive  society,  331. 

Concentration  of  control,   292-315. 

Concentration  of  industries,  169-70. 

Concentrative  influence  of  machin- 
ery, 261. 

Conservation  movement,  441. 

Constant  costs,  232,  235. 

Consular  service,  386. 

Consuls,  387. 

Consumer,  144-45 ;  wants  of,  changes 
in,  374-75. 

Consumer's  goods,  5,  6,  201,  318, 
319,  335,  336. 

Consumers'  league,  460. 

Consumption  goods,  see  Consumer's 
goods. 

Contractor,  building,  381. 

Contracts,  299. 

Control :  by  a  dominating  spirit, 
294;  concentrated,  292-315.  See 
also  Social  Control. 

Cooperation,  18,  187 ;  great,  161, 
317;  of  specialists,  315;  through 
exchange,  41,  50,  60,  72,  144,  199, 
316 ;  beginnings  of,  56-71 ;  within 
business  unit,  156 ;  by  authority, 
157. 

Cooperative  agriculture  and  farming, 
287 ;  medieval,  32,  42. 

Cooperative  concerns,  287. 

Coordination  of  specialized  effort, 
406,  407. 

Copeland,  M.  T.,  179. 

Copper  industry,  185. 

Copyright  law,  309. 

Corporation,  busine.ss,  67,  271-85, 
287,  355,  361,  362,  364 ;  a  means  of 
concentrating  control,   292;  evils 


of,  277 ;  attempt  to  remedy  evils, 
278-80;  organization  charter  of, 
278 ;  part  of,  in  our  business  life,  280. 

Corporations,  United  States  Com- 
missioner of,   161. 

Cost  accounting,  233,  241. 

Cost  administration,  variables  in, 
diagram  of,  244. 

Cost  diagram,  234. 

Costs  of  production,  250,  262;  con- 
stant, 232,  235;  direct,  in  tech- 
nological industry,  231;  indirect, 
250,  253,  255,  262 ;  and  social  con- 
trol, 243 ;  in  technological  indus- 
try, 231-49 ;  stimulate  enlargement 
of  business,  237. 

Cotters,  31,  33. 

Cotton,  grades  of,  144. 

Cotton  cloth  manufacture  in  Eng- 
land, 111-15,  179. 

Cotton  exchange,  141. 

Cotton  gin,   113. 

Cotton  mill,  195,  225. 

Cotton  planter,  effect  of  war  upon, 
376-77. 

Courts,  41 ;  king's,  31,  79 ;  manorial, 
31,  34,  79;  merchants',  61,  64. 

Craft  gilds :  origin  of,  45 ;  regula- 
tions of,  47 ;  summary  of  work  of, 
48. 

Craftsmen  under  the  gild  system, 
42,  45,  51,  64,  81,  195,  202,  406, 
455,  456. 

Credit,  338,  355,  367;  alleged  ad- 
vantages of,  372. 

Credit  information,  387. 

Crises,  business,  378. 

Crop  reports,  384. 

Crompton,  Samuel,  113. 

Crops,  106,  110,  216,  391. 

Crusade,    67,    74. 

Curb  market,  366. 

Custom,  323,  331,  474-76;  advan- 
tages of,  475-76;  medieval,  29, 
31,  34,  57,  68,  73,  75,  102,  110, 
316,  475,  476,  478;  origin  of,  475; 
primarily  a  basis,  476;  survivals 
of,  475- 


INDEX 


493 


Cutthroat  competition,  242,  259, 
302. 

D 

Dagyr,  John,  175. 

Darwin,  Charles,  484. 

Davy,  Sir  Humphry,  114. 

Day,  Chve,  41,  89. 

Death-rate,  8,  450. 

Deaths,  preventable,  loss  through, 
450-52,  459. 

DecentraUzation  of  industries,   182. 

Deferred  payments,  337,  338. 

Definite  agreements,  299. 

Demesne,  29. 

Dependents,  458. 

Desert,  effect  of  irrigation  on,  432. 

Detailed  operation,  159,  195. 

DeWitt  Clinton  locomotive,  picture 
of,   117. 

Dickens,  Charles,   185-87,   195. 

Differentiation  of  tasks,    197-98. 

Diminishing  returns,  law  of,  402 ; 
financial  phase,  402;  technologi- 
cal phase,  402. 

Disease,  373;  prevention  of,  459. 
See  also  Public  health. 

Distributing  centers,  177. 

Division  of  labor,  149-51,  152,  154, 
192,    212. 

Dollar,  343 ;  unit,  337-40. 

Domestic  system,  manufacture  un- 
der, 82-84,  119,  120. 

Domestic  trade,  organization  of, 
in  medieval  England,  62. 

Dominating  spirit,  control  by,  294, 
298. 

Doomsday  Survey,  32. 

Drainage,  76,  110,  440. 

Draper,  99. 

Dry  goods  trade,  181,  356. 

"Dumping"  of  goods,  238-39. 

Dun  Commercial  Agency,  379,  387. 


E 


Economic    activities,    planning   and 
guiding  of,  316,  468-87. 


Economic  goods,  5,  7. 

Economic  insufficiency,  457-58. 

Economic  organization :  is  useful, 
17 ;  ever  changing,  20 ;  forms  of, 
18-19;  orderly,  19-20;  want- 
gratifying  machine,   19. 

Edison,  7,  238. 

Education :  business,  in  medieval 
times,  48;  of  business  managers, 
330. 

Educational  institutions,  390.  See 
also  Schools. 

Efficiency,  412. 

Effort,  economical  regulation  of, 
405-09;  involves  coordination  of 
specialists,    406. 

Eggs,  production  of ,  129-31. 

Electric  light  and  power  company 
costs,  239. 

Electric  power,  414,  431,  435. 

Employers'  associations,  299,  324, 
483. 

Employment  agencies  :  private,  460 ; 
public,   460. 

Employment  department,  chart  of 
functions  of,  463. 

Employment  manager,  461. 

Enclosures,  see  Inclosures. 

Engineering,  .391. 

England :  commercial  leadership  of, 
89 ;  Industrial  Revolution  in,  106- 
26 ;  medieval  industrial  system  in, 
25-71,  245;  changes  from  medi- 
eval sy.stem  to  1750,  72-105. 

Engrossing,  44. 

Enterprisers,  327,  341,  369,  376, 
454;  selection  of,  329;  tasks  of, 
in  meeting  risks,  372-96 ;  work 
of,  in  the  internal  management 
of  business  unit,  397-418. 

Entrepreneur,  see  Enterprisers. 

Environment,  2-4;  animal,  2,  3; 
plant,  2,  3;  social,  325. 

Erosion,  438,  440. 

Evolutionary  philosophy,  484. 

Exchange,   367;  "mediated,"   367. 

Exchange  cooperation,  see  Coopera- 
tion through  exchange. 


494 


INDEX 


Exchange  facilitators,  200,  367. 
Exchanges,    366;    grain,    137,    366; 

organized,  137. 
Experience,    systematic    use    of,    in 

management,  403,  408,  412. 
Explorations  and  discoveries,  76-77, 


Factory,  conditions  in,  405,  483. 

Factory  acts,  English,  483. 

Factory  costs,  233. 

Factory  laws,  459. 

Factory  manager,  17. 

Factory  system,  456;  beginnings 
of,  115. 

Fair  price,  medieval  doctrine  of, 
67,  68,  480. 

Fairs,  64;  origin,  62-63. 

Fall  River,  Massachusetts,  172,  218. 

Family,  337,  340,  452,  453,  458, 
477;  budget  of,  338;  objectives 
of,  468,  473. 

Famines,  56. 

Farm  laborers,  75. 

Farmer,  75,  338,  339,  341,  355,  373. 

Farming,  120;  cooperative,  287;  il- 
lustration of  law  of  diminishing 
returns,  401-02;  medieval,  32,  42, 
56,  1 10.     See  also  Agriculture. 

Fashion,  changes  in,  374,  380. 

Fatigue,   195,  451,  454. 

Federal  Trade  Commission,  307, 
308. 

Feudal  lord,  see  Lord  of  the  manor. 

Feudalism,  decay  of,  79.  See  also 
Manor. 

Finances,  medieval,  59. 

Financial  institutions,  261,  354-72. 

Financial  organization  of  society, 
diagram  of,  361-62. 

Fire,  373,  383 ;  protection,  390. 

Fisher,  Irving,  450. 

Flanders  Fleet,  61,  65. 

Fluctuations  in  industrj^  452-53 ; 
cyclical,  453 ;  sea.sonal,  452-53, 
460. 


Flying  shuttle,  112. 

Foreign  demand,  387. 

Foreign  market,  238. 

Foreign  trade  (English)  :  medieval, 
impediments  to,  58-60;  organiza- 
tion of,  60-62;  under  mercantil- 
ism, 80,  89,  100,  120. 

"Foreigners,"  43,  59,  63,  80. 

Foreman :  functional,  156 ;  old- 
fashioned,  156. 

Forest  Fires,  437. 

Forest  Reserve  Acts,  438. 

Forest  service,  437,  439,  441. 

Forests,  443,  444 ;  conservation,  435 ; 
extent,  436;  losses,  437. 

ForestalUng,  44. 

Fort,  34,  40. 

Free  goods,  1,  4-5. 

Free  tenants  of  the  manor,  30. 

Free  trade,  84. 

Freemen,  33,  43,  73,  74,  75. 

French  Revolution,  121,  348. 

Frontier  life,  18,  316.  See  also 
Pioneer. 

Fulton,  Robert,  117. 

Functional  foreman,  see  Foreman, 
functional. 

Functional  middlemen,  see  Middle- 
men, functional. 

Future  delivery,  382. 

G 

Gain  spirit,  102,  250,  303,  326. 

Gardner,  H.  B.,  225. 

Gary,  Indiana,  174. 

"Gary  dinners,"  298. 

Gas  companies,  310. 

Gas  mining,  426. 

General  manager,  155,  408. 

Gentlemen's  agreements,  297,  299. 

Geological    Survev,    United    States, 

12,  13,420,422,427,429. 
German  Hanse,  61. 
Gibbins,  H.  de  B.,  27. 
Gilbert  and  Pogue,  425,  426. 
Gild  control,  120. 
Gild  fellowship,  62. 


INDEX 


495 


Gild  merchant :  as  town  government, 
44;  of  Southampton,  43. 

Gild  system,  manufacture  under, 
51-52. 

GUda  mercatoria,  42. 

Gilds,  67,  68,  93,  102,  202;  craft, 
45-50;  dechne  of  gilds,  79,  80- 
81;  merchant,  42-44;  monopoly 
control  of,  47;  regulations  of, 
44,  47;  religious  and  social  con- 
trol, 44. 

Gold  as  money,  349. 

Gold  dollar,  343,  344. 

Gold  production,  346. 

Goldsmith  as  banker,  59,  91-93. 

Good  management,  importance  of, 
415. 

Goods,  see  Consumer's  goods,  Eco- 
nomic goods,  Free  goods,  Material 
goods.  Non-material  goods.  Pro- 
ducer's goods,  Want-gratifying 
goods. 

Governmental  control  and  regulation 
of  industry,  68,  120-21,  393, 
484. 

Government  crop  reports,  385. 

Government  intervention  in  appor- 
tioning productive  resources,  321, 
479,  480,  482;  direct,  321;  pro- 
hibitive, 322 ;  promotive,  321,  322 ; 
regulative,  321. 

Grain,  marketing  of,  142-43. 

Grain  exchanges,  137,  366. 

Grain  probe,  143. 

Grocery  business,  298. 

Gross,  Charles,  42. 

Group  objectives,  468. 

H 

Hamilton,  W.  H.,  342. 
Handicraft  system,  46,  120. 
Handicraft  tailor,  122. 
Hanseatic  League,  61. 
Hargreaves,  James,  112. 
Harriman,  E.  H.,  294. 
Harvest  field  work,  seasonal,  453. 
Hat  manufacture,  237-38,  241. 


Hedging  operations  of  the  Board 
of  Trade,  381. 

Heredity,  331.      • 

Heubner,  S.  S.,  138. 

Hob.son,  J.  A.,  195,  261-62. 

Hoffman,  F.  L.,  452. 

Holding  company,  294. 

Hollander,  J.  H.,"  457. 

Horizontal  grouping  in  industry,  260. 

Hotel  business  costs,  231-33. 

Housing,  226,  459 ;  medieval,  27,  41. 

Howard,  L.  O.,  451. 

Hull-Hoase  Museum,  209. 

Human  resources,  waste  of,  448-64; 
agencies  concerned  with  preven- 
tion of,  459-64;  due  to  economic 
insufficiency,  457-58;  particularly 
significant  among  the  workers, 
455-56 ;  through  idleness,  449, 
450;  through  preventable  acci- 
dents, illnesses,  and  deaths,  449, 
450 ;  through  unemployment,  449, 
452;  through  ineffective  utiliza- 
tion, 449,  453-55. 

Human  resources,  wise  utilization  of, 
448-67. 

Human  waste,  forms  of,  449 ;  re- 
duction of,  456. 


Ideals,  social,  473 ;  changes  in,  479. 

Idleness,  waste  of,  450. 

Ilhnois,  183. 

Illnesses,  459;  preventable,  450-51. 

Imitation,  477 ;  in  locating  factories, 

174. 
Impersonality  in  industry,  202,  226. 
"Incentive,"  405,  457;  waste  due  to 

lack  of,  454,  456. 
Inclosures,    75,    76,    80;  second   in- 

closure   movement.    111. 
Incorporation,  certificate  of,  272. 
Individual  firm,  268,  275,  276,  361, 

362. 
Individuali.sm,    121,  481. 
Individuals,  195,  324,  482. 
Indorsement  of  note,  357. 


496 


INDEX 


Industrial  accidents,  451-52,  455, 
459. 

Industrial  Commission,  United 
States,  Report  of,  141. 

Industrial  disputes,  376,  392. 

Industrial  engineer,  398,  412. 

Industrial  Management  Magazine, 
244. 

Industrial  Revolution,  106-26,  208, 
259;  and  inventions,  112;  second 
phase  of,  1 18. 

Industries:  concentration  of,  169- 
70;  continual  shifting  in  location 
of,  180;  elaborative,  171;  manu- 
facturing, localization  of,  168; 
primary,  localization  of,  1G7. 

Industry  :  English,  stages  of  develop- 
ment' of,  122-23;  infant,  184; 
medieval,  245 ;  simple  versus  com- 
plex, 245. 

Infant  industry,  184. 

Information,  business,  138,  387-92; 
transfer  of,  96,   137. 

Initiative,  373,  454,  456. 

Innkeepers,  96. 

Insurance  and  insurance  companies, 
94,  373,  374,  382-83,  460;  be- 
ginnings of  business  and  fire  in- 
surance, 93-94;  social  insurance, 
460. 

Integration  of  industry,  260. 

Interchangeable  parts,  212. 

Interdependence  of  industrial  society, 
201,  202,  376,  379. 

Interest,  91. 

Interlocking  directorates,  296. 

International  Harvester  Company, 
212,  213,  215,  406,  407. 

Interstate  Commerce  Commission, 
295,  306. 

Inventions,  112-15,  181,  207,  218, 
220,  375,  456. 

Investment    institutions,    361-66. 

Iron,  33,  107,  222,  260 ;  distribution 
of,  in  United  States,  13;  produc- 
tion, 115. 

Irrigation,  440. 

Ise,  John,  437,  440. 


Italy :  accounting  in,  99 ;  cities  of, 
198;  merchants  of,  60,  63;  Re- 
naissance starts  in,  78. 


Johnson,  A.  S.,  15. 

Joint  husbandry,  36. 

Joint  stock  company,  102,  261,  286. 

Journeymen,  47,  48,  81. 

Jusserand,  J.  J.,  65. 

K 

Kellogg  and  Ziegler,  438. 

Kimberley  Diamond  Mines,  311. 

King,  W.I.,  221,  280. 

King's  court,  31,  79. 

Knowledge,  acquired,  a  help  in 
adaptation,  16,  194;  increase  of 
knowledge  lessens  risks,  383 ;  pre- 
requisite to  good  citizen.ship,  485. 

Kober,  G.  M.,  451. 


Labor  disputes,  376,  392. 

Labor  power,  173,  399,  448,  452, 
462;  definition  of,  14. 

Labor  union  group,  472. 

Labor  unions,  461. 

Laissez  fairs,  121-22,  481,  482,  483. 

Lancashire,  England,  cotton  manu- 
facture center,  179. 

Land,  11. 

Land  resources,  318. 

Land  tenure,   medieval,  29-30. 

Large-scale  industry,  149-57,  239, 
246,    256-58,   269,    278. 

Law,  478,  480 ;  of  business  dealings, 
63-64;  of  diminishing  returns, 
402;  of  location,  21,  40,  53. 

Laws,  "blue  sky,"  279. 

Lease,  301. 

Legal  monopolies,  309. 

Legislation,  social,  462-64. 

Lesher,  C.  E.,  422. 

Lipson,  E.,  ()3. 

Loan  agents,  135,  355. 


INDEX 


497 


Loan  business,  269,  271. 

Loans,  91 ;  made  by  commercial 
banks,    357-61 ;  short-time,    355. 

Location  :  of  commercial  enterprises, 
177-78;  of  industries,  180,  192; 
of  manufacturing  industries,  168, 
174 ;  of  manufacturing  plants,  fac- 
tors determining,  170-77;  of  pri- 
mary industries,   167. 

Location,  law  of,  21,  40,  53. 

Lockouts,  376. 

Lord  of  the  manor,  27,  30, 33,  34,  57, 
73,  74,  75,  79. 

Lumber  products  by  states,  171. 

Lumbering,  437,  439,  453. 

Luxuries,  14,  60,  322. 

Lynn,  175. 


M 


Macadam,  116. 

McCulloch,  Walter,  430,  431. 

Machine:     pervasiveness    of,     135 
power  driven,  220 ;  what  it  is,  209 

Machine  industry,  246 ;  accidents  in 
451-52;  and  the  growing  market 
116;  growth  of,   220;  in  agricul- 
ture, 226;  rise  of,  106,  207,  455 
serious  problems  due  to,  226. 

Machinery :  productivity  of,  214 
specialized,  152. 

Machinist,  158. 

Mail  order  houses,  242,  376,  414. 

Malaria,  451. 

Man,  goal  of  economic  activity,  197. 

Man-power,  216,  448.  See  also 
Human  resources. 

Management,  461 ;  of  corporations, 
277;  principles  of  management, 
403;  specialization   of,    154-57. 

Manager,  business,  354;  position 
of,  summarized,  412-15;  of  busi- 
ness units,  200;  of  industrial  re- 
lations, 461. 

Manor,  medieval,  26-39,  42.  51, 
56,  79,  102,  128,  158,  182,  373; 
diagram  of,  28.     See  also  Vill. 

Manor  house,  27,  30,  33. 


Manorial  court,  31,  75,  77. 

Manufacture :  changes  in,  after  medi- 
eval period,  79,  106,  111;  in 
medieval  England,  40-55;  ma- 
chinery in,  216-46;  number  of 
corporations  in,  281 ;  under  do- 
mestic system,  119;  under  gild 
system,  51-52;  under  handicraft 
system,  83-84;  under  modern 
capitalism,  51-52,  119;  beginnings 
of,  79. 

Manufacturing  business,  organiza- 
tion chart  of,  156;  possible  de- 
partments of,  diagram,  408. 

Manufacturing  industries,  location 
of,  168,  170. 

Manufacturing  towns,  185-87. 

Map  of  spheres  of  trade  of  English 
commerce  in   17th  century,    191. 

Market  expansion,  116,  118,  158, 
199. 

Market  organization,  definition  of, 
200. 

Market  town,  64. 

Markets,  141,  246,  251,  255,  262, 
302,  391,  397;  accessibility  to, 
173,  180;  foreign,  80;  grain,  137, 
140;  medieval,  33,  41,  59,  64,  80, 
245;  origin  of,  62-63;  unknown, 
377;  world,   108,   111. 

Marx,  Karl,  210. 

Material  goods,  5. 

Maximum  efficiency,  size  of,  in  busi- 
ness, 264. 

Meadow  land,  manorial,  30. 

Meat-packing  industry,  152,  251 ; 
specialization  in,  150.  See  also 
Packing  industry. 

Medieval  industrial  society  (English), 
functioning    structure    of,    25-71. 

Medieval  system,  changes  from,  to 
1750,  72-105. 

Mental  activity,  77-78. 

Mercantilism,  120,  480,  481. 

Merchant  adventurers,  62,  100. 

Merchant  gilds,  42-44. 

Merchants,  338;  medieval.  62,  65, 
90,  92,  478. 


498 


INDEX 


Merchants,  Italian,  60,  63. 

Merchants  of  the  staple,  61. 

Merrimac  River,  433. 

Michigan,  185. 

Middle  class,  51. 

Middlemen,  144-45;  .specialization 
of,  within  a  given  trade,  98. 

Middlemen,  financial,  357,  364,  365. 

Middlemen,  functional,  144,  367 ; 
rise  of,  90-97. 

Mill,  J.  S.,  197. 

Millers,  382,  386. 

Minds,  110. 

Mineral  resources,  168. 

Mines,  United  States  Bureau  of, 
423. 

Minimum  wage  laws,  461. 

Mining  and  mining  industries,  168, 
282,  422.  See  also  Oil  mining.  Gas 
mining.  Coal  mining. 

Minneapolis,  216. 

Minnesota,  183,  187,  222. 

Minnesota  Grain  Inspection  De- 
partment, 143. 

MitcheU,  W.  C.,  201. 

Monastery,  40,  67. 

Monetary  busine.ss,  261. 

Monetary  .systems,  defects  of,  350. 

Money  :  and  apportionment,  339 ; 
and  business  men,  338;  charac- 
teristics of  good  money,  348-50; 
commodity,  343;  kinds  of,  344; 
a  measuring  stick,  336,  337-38; 
medieval,  33,  67 ;  a  medium  of 
exchange,  337 ;  representatives  of 
money  .  unit,  344 ;  a  standard  of 
deferred  payment,  337 ;  useful 
functions  of,  341 ;  what  it  is,  342- 
44. 

Money  economy,  199,  200. 

Money  exchange,  368. 

Money  payments,  73,  75. 

Money  pools,  299. 

Money  services,  specialization  in 
production,  135-37. 

Money  unit,  337,  338,  339,  340. 

Monopoly,  250,  264,  302;  medieval, 
61,  62,  66;  of  coinage,  344 ;  "  regu- 


lation by  the  ax,"  306-07;  various 
kinds  and  their  control,  309. 

Monopoly  control  of  gilds,  43,  47. 

Monopoly  gains,  302. 

Montgomery  Ward,  376. 

Moral  standards,  336. 

Morgan  and  Company,  296. 

MoiUton,  H.  G.,  347,  360,  367. 

Municipal  enterprises,  288. 

Munitions,  327. 

N 

NaUs,  107,  116,  218,  222. 

National  government  as  an  economic 

unit,  79. 
National       Industrial      Conference 

Board,  299. 
National  life,  197,  480. 
National    Museum,    United   States, 

428,  429. 
National  objectives,  469-71. 
Natural  forces,  207,  211,  213,  451. 
Natural  monopoly,  309,  310,  311. 
Natural  order,  121,  481.  484. 
Natural  resources,  11-14,  167,  181; 

available    supply,    419-47;     wise 

utilization  of,  419-47. 
Natural  risks,  373. 
Needles,  217. 

New  Britain,  Connecticut,  173. 
New  England,   172,   173,   175,    181, 

434,  435. 
New  York  bread  line,  457. 
Newell,   Frederick  Haynes,  442-43. 
New.spapers,   479;  beginning  of,   in 

England,  96. 
Nicholson,  J.  L.,  233. 
Night  work,  48. 
Non-material  goods,  5. 
"Normal  times"  in  industry,  453. 
Noyes,  237. 
Nystrom,  Paul  H.,  133. 

O 

Objectives,  social,  see  Social  objec- 
tives. 


INDEX 


499 


Obsolescence,  236,  270. 

Office  work,  specialization  in,  150- 
51,  153. 

Oil  and  oil  mining,  424,  426,  443, 
444;  oil  lakes,  427;  oil  shales, 
428;  oil   wells,    426. 

Open  field  system  of  the  manor,  27- 
29,  106,  111. 

Ore,  217,  258. 

Organizers  of  productions,  see  Enter- 
prisers. 

Overhead  costs,  255.  See  also  Costs, 
indirect. 


Packing  industry,  251-58,  260,  262, 
264. 

Paper  devices,  361,  363. 

Paper  money,  345,  348. 

Partnership,  100,  270,  275,  276,  287, 
355,   361,   362;  limited,   286. 

Partnership  articles,   270. 

Partnership  association,  286. 

Patents,  control  of,  300,  308. 

Payment  in  kind,  31. 

Payments  for  goods,  92,  337,  338. 

Peace,  448. 

Peddlers,  62,  65,  94. 

Pennsylvania,  mining  in,  422. 

Per-sonal   effectiveness,    404-5,    412. 

Personal  preferences,  325. 

Personnel  department,  461. 

Pestilence,  56,  74,  196. 

Petroleum ;  pools,  427,  428 ;  supply, 
428;  wastes  of,  425. 

Pig  iron,  uses  of,  160. 

Pin-making,  120,  152. 

Pinchot,  Gifford,  437,  440,  442. 

Pioneer,  4,  15,  16;  productive  re- 
sources of,  316. 

Piracy,  60,  61,  66. 

Pittsburgh,  185. 

Police  regulations  of  medieval  gilds, 
44. 

Pools :  money,  299 ;  petroleum,  427, 
428;  traffic,  299. 


Population,  117,  118,  173,  226. 

Post-office  system,  establishment  of, 
96. 

Poverty,  457-58. 

Poverty  Une,  458. 

Power,  219,  262,  410;  sources  of, 
211. 

Preferred  stock,  281-84,  294,  296; 
certificate  of,  282;  cumulative, 
284. 

Premiums,  93,  382. 

Press,  478,  479. 

Price-fixing  agreement,  300. 

Prices,  201,  304,  336,  413;  changes 
in,  345-47;  just,  67,  78;  levels 
of,  347. 

Primary  industries,  259. 

Primitive  man,  207. 

Printing,  invention  of,  77. 

Printing  business,  268. 

Printing  press,  78,  218. 

Private  property  rights,  325. 

Problems  of  modern  societv,  319- 
20. 

Processes,  158,  193. 

Producer,  144-45. 

Producer's  goods,  5,   15,  335,  336. 

Production :  increased  by  effective 
adjustment  of  productive  resources, 
398-401 ;  increased  by  specializa- 
tion, 192;  large-scale,  119;  round- 
about, 213. 

Production  goods,  see  Producer's 
goods. 

Production  manager,  408;  diagram 
of  possible  departments  under, 
409. 

Productive  resources,  315,  316,  398. 

Profits,  245,  355;  taken  by  enter- 
priser, 327,  328. 

Promissory  note,  356;  bonds  as, 
284. 

Protection,  184-85. 

Proxies,  293,  294. 

Public  health,  medieval,  27,  41. 

Public  Health  Service.  459. 

Public  opinion,  323,  478. 

Public;  utility  monopolies,  310. 


500 


INDEX 


Q 

Quaintance,  H.  W.,  216. 

R 

Railroads,  117,  235,  239,  243,  294, 
295;  accidents,  390,  469;  rates, 
175. 

Raisin-growers,  311. 

Rational  methods,  476,  478. 

Raw  materials,  382;  proximity  to, 
171-72;  stock  record  of,  410. 

Reclamation  Service,  United  States, 
432,  442. 

Redeemable  representative  money, 
344. 

Reeve,  30. 

Reforestation,  437. 

Reformation,  78,  81. 

Refrigerator  car,  181,  252-54. 

Regrating,  44. 

Regulated  companies,  62,  102. 

"  Regulation  by  the  ax,"  306,  307. 

Renaissance,  78. 

Residual  claimant,  284. 

Rise  of  strong  central  government, 
79,  120. 

Risk-takers,   93,   372-96,   412-15. 

Risks  in  speculative  society,  226, 
262,  251,  452,  460;  reflected  in 
business  failures,  379;  reduced 
through  advertising,  380;  increase 
of  knowledge,  382-89 ;  insurance, 
382 ;  large-scale  industry,  256-58 ; 
science,  390;  social  control,  391; 
speculative  contracts,  381-82 ; 
sources  of  risks,  changes  in  con- 
sumer's wants,  changes  in  methods 
of  production,  375;  industrial 
disputes,  376,  392;  interdepend- 
ence of  industrial  society,  377, 
natural  causes,  373,  375,  391 ; 
technological  industry,  378. 

Rivers,  434. 

Roads  and  road  building,  57,  107, 
110. 

Robbers,  medieval  merchants'  pro- 
tection against,  42,  58. 


Roebuck,  115. 
Roosevelt,  440,  442. 
Roosevelt  Dam,  Arizona,  434. 
Ross,  E.  A.,  172,  173. 
Russell    Sage    Foundation    pubhca- 
tion,  462. 

S 

Safety  first  movement,  459. 

Salesman,  377,  389. 

Sales  manager,  155,  403. 

Salt,  33. 

Samplers  of  grain,   143. 

Satellite  towns,  182. 

Saving,  337. 

Savings  bank,  135,  337,  365. 

Schools,  323,  325,  330,  390,  473,  475, 
477,  479. 

Science  in  industry,  109,  118,  208, 
255,  390. 

Scientific  laboratories,  262. 

Scientific  management,  156,  412. 

Scott,  Walter  Dill,  454-55. 

Seager,  15. 

Sears  Roebuck,  376. 

Seasonal  fluctuations,  379,  460. 

Seasonal  occupations,  198. 

Securities,  364,  365,  366. 

Self-suflRciency,  18;  of  the  will,  32- 
34. 

Self-sufficing  medieval  English 
manor,  25-39. 

Senior,  N.  W.,  15. 

Serfdom,  decay  of,  74,  77. 

Serfs,  51,  73. 

Services  (non-material  goods),  5-6. 

Seven  Sisters  of  New  Jersey,  307. 

Shares,  275. 

Shays's  Rebellion,  171. 

Sheep-raising,  75. 

Sherman  Anti-Trust  Law  of  1889, 
306. 

Ships  and  shipbuilding,  381,  390. 

Shipwrecks,  17,  390. 

Shoe  manufacture :  accounting  rec- 
ords in,  412;  apportionment  in, 
339;  cooperation     of     .specialized 


INDEX 


501 


units  in,  131-32;  effect  of  war 
upon,  377;  location  of,  175;  spe- 
cialization of  capital  in,  152; 
specialization  of  labor  in,  149-50, 
157,  195. 

Shops,  64. 

Sick  benefits,  461. 

Sickness,  see  Illnesses. 

Slaughtering  industrj^,  253.  See  also 
Packing  industry. 

Small,  A.  W.,  473. 

Small  firms,  263. 

Smith,  Adam,  121,  152,  161. 

Smith,  J.  RusseU,  14,  178,  ISO. 

Soap,  107,  116. 

Social  attitudes,  322. 

Social  classes,  73,  75;  of  medieval 
England,    30-32,    51.    . 

Social  control,  175,  180,  181,  226, 
321,  462,  485;  and  indirect  costs, 
243;  and  manager,  414;  reduces 
risks,  391-92. 

Social  development,  471. 

Social  environment,  175 ;  and  growth 
of  packing  industry,  257. 

Social  forces,  471. 

Social  groups,  468. 

Social  ideals,  473,  479. 

Social  institutions,  322-23,  476. 

Social  insurance,  460. 

Social  legislation,  462-64. 

Social  living,  contribution  of  ma- 
chine industry  to,  225. 

Social  objectives,  468-85;  difficult 
to  formulate,  471 ;  ideal  states, 
473 ;  methods  available  for  at- 
taining, 474. 

Social  resources,  11-24,  321,  471. 

Socialists  and  socialism,  288,  321, 
373. 

Society,  194-95;  changing,  20,  414; 
problem  of  modern  society,  319- 
20. 

Society's  resources,   17,  397,  473. 

Soil  and  soil  resources,  11,  391, 
440. 

Soldiers,  448. 

South,  effect  of  Great  War  on,  397. 


Southampton,  Gild  Merchant  of,  43. 

Speciahsts,  90,  315-16,  367 ;  coordi- 
nation   of,    408;  functional,    456. 

Specialization,  368,  405;  and  inter- 
dependence, 201;  advantages  of, 
192;  evaluation  of,  192;  has  re- 
sulted in  a  more  speculative  so- 
ciety, 203 ;  in  occupations,  128 ;  in 
producing  money  services,  135- 
37 ;  increases  productivity,  192 ; 
limits  of,  197;  makes  for  imper- 
sonality, 203;  of  capital,  152;  of 
economic  units,  127,  129 ;  of  labor, 
149-51,  152,  154;  of  localities, 
192 ;  of  management,  154 ;  narrow, 
195,  196;  possible  disadvantages 
of,  194;  social  control  of,  195; 
successive  specialization  series  of 
activities,  159-61 ;  technological 
limits  remote,  193;  territorial, 
167-91,  192;  two  aspects  of,  dif- 
ferentiation and  knitting  together, 
197;  within  business  units,  149; 
within  districts,  178. 

Specialized  business  units,  131;  or- 
ganization of,  144. 

Specialized  machinery,  152. 

Specialized  productive  enterprises, 
128. 

Speculative  contracts,  381. 

Speculative  industry,  241. 

Speculative  society,  203;  risks  in, 
373-96. 

Spencer,  Herbert.  3. 

Spinning,  112-13. 

Spinning-jenny,  112. 

Spinning-mule,  113. 

Springfield,  Illinois,  462. 

Sprinkler  systems,  390,  400. 

"Square  deal,"  472. 

Stable  money,  349. 

Stagecoach,  95,  261. 

Standard  of  living,  American,  443. 

Standard  Oil  Trust,  301. 

Standard  Statistics  Co.,  387. 

Standardization,  due  to  machine, 
136 ;  of  processes,  263. 

Staple  towns,  61. 


502 


INDEX 


State  enterprises,  288. 

State  sovereignty,  470. 

Statistical  companies,  387. 

Steamboat,  117. 

Steam  engines,  113. 

Steel  industry,  115,  222;  growth  of, 

258-260;    "understandings"     in, 

298. 
Steelyard,  61. 
Stevens,  Bertha,  150. 
Stock  certificates,  276. 
Stock  dealers,  251,  252. 
Stock  exchange,  366. 
Stocks,  279,  281,  364. 
Stockholders,  278,  279,  296,  301. 
Storage  warehouses,  96. 
Stream  flow,  steadiness  of,  433. 
Strikes,  376. 
Strip   system    in   medieval    asricil- 

ture,  29,  74. 
Struggle  for  existence,  3. 
Style,  changes  in,  374,  380. 
Substitution,  202. 
Suez  Canal,  375. 
Survivals  of  custom,  475. 
Swain,  George  F.,  431,  433. 
Swift  and  Company,  256,  258. 


Tar,  33. 

Tariff,  185. 

Taxes,  58,  62,  97,  322,  335. 

Technological  character  of  modern 
industry,  207,  208,  378,  413,  414. 

Technology,  schools  of,  390. 

Telephone  companies,  310. 

Telford,  116. 

Tenants,  75,  111;  of  the  manor,  29- 
32,  33. 

Territorial  specialization,  167-91, 
192;  advantages  of,  182-85;  dis- 
advantages of,  185-87 ;  means  in- 
terdependence and  cooperation, 
187 ;  within  a  town  or  city,  179-80. 

Thrift,  443. 

"Ticker,"  384. 

Time  and  motion  study,  399-400. 


Time  tickets,  410-11. 

Tobacco  monopoly  in  France,  310. 

Tolls,  43,  58,  62,  63. 

Tool  industry,  119,  245. 

Tools,  116,  209-10,  400. 

Towns,  market,  64. 

Towns,  medieval,  33,  40,  79-,  be- 
ginnings of,  40 ;  charters  of,  51 ; 
economic  activities  of,  41 ;  manu- 
facture in,  51-52;  significance  of, 
50-51 ;  size   and   appearance,    41. 

Towns,  staple,  61. 

Trade,  internal,  184;  international, 
184;  free,  184. 

Trade  and  commerce ;  medieval,  de- 
velopment of,  56-71 ;  rise  of  mod- 
ern organization  of,   88-105. 

Trade  acceptance,  sample  of,  357. 

Trade  associations,  297,  298,  299. 

Trade  credit,  355. 

Trade  journals,  389,  460. 

Trade  marks,  309. 

Traders,  42,  51. 

Trades,  158,  193. 

Trading  companies,  development  of, 
100,  102. 

Traffic  pools,  299. 

Transportation,  96,  107,  116,  171, 
178,  181,  182,  252,  257,  261,  263, 
280,  288;  break  in,  21,  40,  53; 
medieval,  57-58,  60. 

Trustee  idea,  301. 

Trustees  in  a  corporation,  287. 

Trusts,  243,  250,  264,  292,  302 ;  be- 
ginning of  term  "tru.st,"  391; 
charges  made  against,  303-04; 
remedial  action  for,  306-09. 

Tuberculosis,  450. 

Tufts,  James  H.,  32,  51. 

Turnips,  106,  110. 

Typhoid,  451. 

U 

Unemployment,  450,  455;  a  source 
of  waste,  452-53;  reduction  of, 
460. 

Union  Stockyards,  view  of,  258. 


INDEX 


503 


University  of  Pennsylvania,  Depart- 
ment of  History  Reprints,  43,  44, 
45. 

United  States  Steel  Corporation, 
298;  rise  of,  258,  260. 

Usury,  67,  91. 


Vertical  grouping  in  industry,  260. 

Vill :  economic  organization  of,  34 ; 
layout  of,  26-30 ;  self-sufficiency 
of,   32-34.     See  also   Manor. 

Villains,  30-31,  32,  33,  35;  eman- 
cipation of,  73,  74,  75;  property 
rights  of,  30-31. 

Virgate,  29. 

Virginia  colonists,  18. 

Vocational  guidance  movement,  4;';0. 

Voting,  limited,  279. 

Voting  power,  294. 

Voting  trust,  287. 

W 

Wage  laborers,  31. 

Wage  workers,  456. 

Wages,  202. 

Wagoners,  94. 

Wants,    human,     1-10,      11,     380; 

changes  in,   374;  endless  variety 

of,  2,  7;  gratification  of,  1-10. 
Want-gratifying    goods,    5,    6,    15, 

17. 
Want-gratifying    machine,     19,    25. 

315,  340.  " 
War  time,  300,   448;  and   national 


ideals,  469-71 ;  objectives  in,  469- 
71. 

War,  Great,  effect  of,  327,  377. 

Warehouses,    96. 

Waste,  manorial,  29. 

Waste  of  human  resources,  448-64: 
of  natural  resources,  419—47. 

Watch-making,  154,  212. 

Water  power,  172,  419,  420;  con- 
servation of,  430-31 ;  control  of, 
by  storage,  434,  bj'  forests,  435; 
engineering  problem  involved  in, 
433. 

Water  routes,  58,  60,  77,  116. 

Water  supply  systems,  288. 

Wealth  (material  goods) ,  5-7 ;  forms 
of,  5-6. 

Weather  Bureau,  391;  reports,  386. 

Weaving,  112,  113,  218,  375. 

Webb  bill,  300,  309. 

Weber,  174. 

Week-work,  31. 

Westerfield,  R.  B.,  83,  98. 

Wheat,  132,  382. 

White,  Andrew  D.,  348. 

Whitney,  Eli,  113. 

"Will  to  do,"  405,  454,  456,  461. 

Wilson,  President,  470. 

Women  in  industry,  154,  173,  483. 

Woodland,  29. 

Wool  stapler,  98. 

Woolen  industry,  commercial  organi- 
zation of,  98-99. 

Workers,  455. 


Yeats,  168. 


Printed  in  the  United  States  of  America. 


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